A Liquidity Motivated Algorithm for Discerning Trade Direction

22 Pages Posted: 26 Jun 2015

See all articles by David Michayluk

David Michayluk

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Laurie Prather

Bond University - Faculty of Business, Technology and Sustainable Development

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Date Written: June 26, 2015

Abstract

Most exchanges do not report trade direction thus researchers and traders must deduce whether a trade is buyer or seller initiated since this information is required to evaluate models of bid-ask spread components and to understand the market for immediacy. Algorithms that assign trade direction based on the proximity to bid or ask quotes are easily implemented but ignore information readily discernable from orders, changes in the quoted depth and subsequent price movements. Using the New York Stock Exchange Trades, Orders and Quotes database, systematic biases in existing trade direction algorithms are documented that can be rectified by recognizing that the impact on liquidity is the fundamental characteristic underlying order placement. Although this liquidity-based method is difficult to implement, it more closely captures the actual behavior of market participants.

Keywords: liquidity; trade direction algorithm; TORQ database; order placement

JEL Classification: G10, G14

Suggested Citation

Michayluk, David and Prather, Laurie, A Liquidity Motivated Algorithm for Discerning Trade Direction (June 26, 2015). Multinational Finance Journal, Vol. 12, No. 1/2, p. 45-66, 2008, Available at SSRN: https://ssrn.com/abstract=2623451

David Michayluk (Contact Author)

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Finance Discipline Group
UTS Business
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Laurie Prather

Bond University - Faculty of Business, Technology and Sustainable Development ( email )

Gold Coast, QLD 4229
Australia

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