Some intraday data series do not contain a buy/sell identifier for trades. As most estimators of transaction costs require this information, an algorithm is necessary to classify trades as buy or sell. When bid/ask quotes (or best buy/sell limit order prices) are available, a natural method is to compare the trade price with the quotes prevailing at the time of the trade. Trades at or above the ask (or best sell limit price) will be classified as buys, trades at or below the bid (or best buy limit price) will be classified as sells. This algorithm will leave trades within the quotes unclassified. Trades within the quotes may be either ‘crosses’ (trades negotiated outside the central market place) or trades where a floor broker or the order book improved on the price of the specialist’s quote, as often happens on hybrid markets like the NYSE. Lee and Ready (1991) show that this algorithm is very reliable and classifies most trades in the same way as the classification based on a comparison with bid and ask quotes.

In all, there are several features of the mortgage market that make overcharging possible. The evidence suggests the following with respect to why consumers are poor shoppers for mortgages and why they are overcharged in today’s mortgage market:

Consumers are in general not familiar with the complicated real estate and mortgage settlement process. Many consumers deal only infrequently with the mortgage process. Many borrowers do not take the time to educate themselves on this inherently complex process.

While most consumers shop extensively, there is evidence that a substantial minority contact only one lender. There is also evidence that those who do little shopping end up paying more.

The complex, multi-faceted nature of real estate settlement transactions further complicates the operation of market forces. The real estate transaction itself (i.e., the home purchase) represents a huge sum of money and will appear more significant to the consumer than any one of the many settlement services. In other words, consumers might focus on the home purchase, rather than closely monitoring the “second-order” mortgage costs.