The EMO Trade Classification Rule

Trade data typically records a price and a size but not whether the buyer or the seller was the one crossing the spread to make the trade happen. Reconstructing that "who initiated" label matters enormously for order-flow research, since buy-initiated and sell-initiated volume carry very different information about near-term price pressure. The EMO rule, named for authors Ellis, Michaely, and O'Hara, is one standard way to make that call.

EMO classifies a trade as buyer-initiated if it executes exactly at the posted ask price, and seller-initiated if it executes exactly at the posted bid price. For the remaining trades, those that print somewhere between the bid and ask, which happens often for actively negotiated or dealer-facilitated trades, EMO falls back to the tick test: a trade is classified as buyer-initiated if its price is higher than the previous trade's price, and seller-initiated if lower. This combination was found, in direct comparison against the alternative Lee-Ready algorithm, to classify Nasdaq trades more accurately, because at-the-quote trades are unambiguous and don't need the tick-test fallback, while the tick test remains a reasonable default for the ambiguous middle-of-spread cases.

No classification rule is perfect; all of them make systematic errors on trades that occur inside the spread during fast-moving markets, and researchers typically validate a chosen rule's accuracy against a labeled subsample before relying on it for a full order-flow study.