Evaluating Trade Classification Algorithms: Bulk Volume Classification versus the Tick Rule and the Lee-Ready Algorithm

Abstract

We compare the accuracy of the Bulk Volume classification (BVC) to that of the conventional rules: the tick rule (TR) and the Lee-Ready algorithm (LR) for a large sample of equities. TR and LR produce significantly better classifications than does BVC. This result applies to stocks of all sizes, including the most frequently traded. Iteratively optimizing BVC improves its performance, but the conventional rules continue to outperform. TR and LR produce more accurate estimates of VPIN; order imbalances computed using TR and LR are comparable to those computed using BVC in explaining returns, liquidity, and trading costs.

Keywords: trade classification, bulk volume classification, tick rule, Lee and Ready, VPIN

JEL Classification: G10