This study directly tests the ability of several competing methods to identify market buy and sell orders using intra-day quote and trade prices, and identifies factors that affect the accuracy of the methods. Lee and Ready's (1991) algorithm performs about the same as the tick test, but the performance of both methods is worse than expected. The results show that the use of either algorithm to classify trades can lead to significantly biased estimates of effective spreads and signed volume, but the tick test provides better estimates of effective spreads and signed volume than Lee and Ready's method. I. Introduction The use of intra-day prices in empirical studies of securities markets is increasingly common and studies frequently require trades be identified as buyer or seller initiated. Unfortunately, most data sets do not identify trade direction. Methods have, however, been proposed that allow trade direction to be inferred from adjacent prices and quotes. The accuracy of these methods and the implica? tions for microstructure research are still unresolved issues in large part because trade direction is unobservable in most financial data sets. This study directly tests the ability of several competing methods to iden? tify market buy and sell orders using intra-day quote and trade prices. The tests are conducted using the TORQ database, a unique data set the New York Stock Exchange makes available to researchers that contains information on trades, quotes, and orders. Using the tick tests and Lee and Ready's (LR hereafter) (1991) method to classify trades as buys or sells, and comparing the results to the direction of the actual orders, I directly test the accuracy of the classification algorithms. The tests also identify the factors that affect the accuracy of the clas? sification methods. Additional tests demonstrate that using these algorithms can lead to biased inferences in two of their most common applications: estimating effective spreads and signed volume trading. Test results also show that the tick

This study examines the hypothesis that in the presence of market frictions, relative put and call prices contain information concerning future returns of the underlying asset. A measure of relative prices is derived from the put-call parity relationship for index options and applied to a three-year sample of OEX option transactions. The results show that the measure of relative index option prices leads the stock market by at least 15 minutes.

Thomas J. Finucane, Black-Scholes Approximations of Call Option Prices With Stochastic Volatilities: A Note, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 4 (Dec., 1989), pp. 527-532