Trade Initiation Classification

Trade initiation classification is the process of determining whether a trade was initiated by a buyer or a seller. This is typically done by comparing the trade price to the current bid and ask prices.

If a trade occurs at the ask price, it is considered buyer-initiated, and if it occurs at the bid price, it is considered seller-initiated. This classification is fundamental for understanding order flow and calculating metrics like VPIN.

It allows researchers to see the direction of market pressure and identify if informed traders are acting on their information. In the fragmented world of crypto, this can be difficult because order books are not always transparent or consistent across exchanges.

However, it remains a crucial tool for analyzing market microstructure and the behavior of different participant types. By classifying trades, analysts can build a clearer picture of who is driving the market and where the liquidity is coming from.

It is an essential step in the analysis of order flow toxicity and the overall health of the market.