Signing trades and an evaluation of the Lee–Ready algorithm

We use techniques developed to analyze the Supply Curve in liquidity models in order to analyze the accuracy of the Lee and Ready algorithm, both for highly liquid and relatively liquid stocks. Through the use of order book data combined with tick data, we are actually (somewhat tediously) able to tell whether or not a given trade is buyer or seller initiated. For those trades where such knowledge is certain, the accuracy of the Lee and Ready algorithm is not as accurate as has been assumed previously. We can essentially prove that the Lee and Ready algorithm is always at least 55% accurate, and is around 61% accurate for highly liquid stocks (i.e., the top 50 of the S&P 100).