Lee–Ready Algorithm
Market Microstructure glossary · Spread Economics & Liquidity Measurement
Definition
A two-step method for classifying trades as buyer- or seller-initiated: first compare the trade price to the prevailing quote midpoint (quote rule) — above the midpoint is buyer-initiated, below is seller-initiated; if the trade prints exactly at the midpoint, fall back to the tick test, which classifies the trade by the direction of the most recent transaction price change (uptick → buy, downtick → sell).
Lee–Ready Algorithm in plain English
When you see a trade happened, you often can't tell whether it was an eager buyer or an eager seller who kicked it off — the Lee–Ready algorithm is a clever guessing rule to figure that out. First it checks the price: the "midpoint" sits halfway between the best buy price and best sell price, so a trade above the midpoint was probably driven by a buyer reaching up, and below it by a seller reaching down. If the trade lands exactly on the midpoint (a tie), it falls back to the "tick test": if the price is higher than the last trade, call it a buy; if lower, a seller. Researchers use this to study who's really pushing prices around, since exchanges don't label trades directly.
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