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.