It appears to use the first letter of the last name OK, but then sometimes messes up on the other letters. I have several players whose name starts with "B" (Beard, Best, Blalock, Bruchman, Bustos). If I keep swapping players from selected players and remaining players, I can get the B's quite scrambled. Similarly I can mix up Good and Gentile and Scott and Siegel.
If I then send orders and then bring up the lineup page, the menus appear to be more correctly alphabetized, but Blalock will always be first.