Asquith, Oman, and Safaya (2010) conclude that short sales are often misclassified by the Lee-Ready algorithm. The algorithm identifies most short sales as buyer-initiated, whereas the authors posit that short sales should be overwhelmingly seller-initiated. Using order data to identify true trade initiator, we document that short sales are, in fact, predominantly buyer-initiated and that the Lee-Ready algorithm correctly classifies most of them. Misclassification rates for short and long sales are near zero at the daily level. At the trade level, misclassification rates are 31% using contemporaneous quotes and trades and decline to 21% when quotes are lagged one second.
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