I need some assistance in understanding the relation between the "bid-ask bounce" and "the tick rule" + "quote rule".
The two rules mentioned above are used to classify the trade direction of executed trades based on data, i.e. "buy" or "sell". Here are the definitions of the two rules:
"Quote rule": You have a Ask and Bid price for a stock, and then you have a midquote which is: (Ask+Bid)/2=midquote. According to this rule you look at whether the trade price is above, beyond or at the midqoute. If the price is above, you classify the transaction as a "Buy", if below "Sell" and if the transaction price is at the midqoute a second rule has to determine the trade classification.
"Tick rule": This rule classifies a trade as buyer-initiated (Buy) if the trade price is above the preceding trade price (an uptick trade) and as seller-initiated (Sell) if the trade price is below the preceding trade price (a downtick trade). If the trade price is the same as the previous trade price (a zero-tick trade), the rule looks for the closest prior price that differs from the current trade price. Zero-uptick trades are classified as buys, and zero-downtick trades are classified as sells.