medium · Market Microstructure
A trader observes the following sequence for a stock: Trade 1 at $50.05, then a Quote Update at $50.00 Bid / $50.06 Ask, then Trade 2 at $50.03.
Using the Lee–Ready algorithm, how is Trade 2 classified?
- Buyer-initiated, because it is closer to the ask than the bid at the time of execution.
- Seller-initiated, because the quote rule always classifies midpoint trades as sells to protect dealers.
- Seller-initiated, because it occurred on a downtick from the previous price of $50.05.
- Inconclusive, because the Lee-Ready algorithm cannot classify midpoint trades.
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