An Analysis of Intraday Quoted Bid‐Ask Spreads in Futures Markets: Evidence from the Sydney Futures Exchange

Abstract

Prior research documents an elevation in bid‐ask spreads at the open and close of trading in futures markets. These findings directly contradict prior literature examining option and equities markets organised as competitive dealer markets, which also document a widening in spreads at the open, but provide evidence of a narrowing at the close. While prior futures market literature has relied on various estimators of bid‐ask spreads, this is the first study to provide evidence on intraday quoted bid‐ask spreads in futures markets. The evidence reported in this paper is consistent with prior equities and options market literature, and suggests that the findings in prior futures market research is driven by the spread estimators used. The primary determinants of bid‐ask spreads (volume & volatility) are both elevated at the open and close of trading, which is similar to patterns documented in prior research. These findings are consistent with the predictions of inventory holding and adverse selection cost models of spreads.