Bid-Ask Spreads, Trading Activity, and Trading Hours: Intraday Evidence from the London Stock Exchange

Posted: 23 Dec 1999

See all articles by Abhay Abhyankar

Abhay Abhyankar

University of Exeter Business School, University of Exeter

D. Ghosh

University of Stirling

E. Levin

University of Stirling

R.J. Limmack

University of Stirling - Department of Accounting and Finance

Date Written: August 1994

Abstract

This paper investigates the intra-day pattern of bid-ask spreads, volatility, and volume on the London Stock Exchange. The primary focus of the study is to relate the empirically observed regularities to specific institutional features of the trading system on the Exchange. We also examine the robustness of the results with reference to changes in the trading hours. The data set used consists of quote and transactions data for about 147 stocks and 835 stocks during two quarters of 1990 and 1991. We test for statistical significance of the average inside spread, the volume, and the return volatility during 15-minute intervals using a GMM ( Generalized Method of Moments ) procedure which is robust to both serial correlation and heteroscedasticity. We also indicate graphically the intra-daily patterns in the inside spread, the trading volume, the number of transactions, and the return volatility. Our results suggest that the bid-ask spread is widest outside the Mandatory Quote Period (MQP), i.e. the period during which market-makers are obliged to post firm quotes. The spread narrows slightly over the trading day for highly traded stocks but is almost constant for less liquid stocks. The spread again widens from the end of the MQP till the close of the SEAQ system. We conjecture that the periods prior to and after the MQP provide "windows" for price discovery prior to the MQP and for "cooling off" after the MQP. Trading volume for the entire sample shows a two-humped shape. However, a crude U-shaped pattern is seen for stocks in the highest trading decile based on volume and number of transactions. Volatility, based on the mid-point of the inside spread, also shows a U-shaped pattern. The higher volatility outside the MQP coincides with the greater price uncertainty prevailing during these time periods.

JEL Classification: G10, G15

Suggested Citation

Abhyankar, Abhay and Ghosh, Dipak and Levin, E.J. and Limmack, R.J., Bid-Ask Spreads, Trading Activity, and Trading Hours: Intraday Evidence from the London Stock Exchange (August 1994). Available at SSRN: https://ssrn.com/abstract=5538

Abhay Abhyankar (Contact Author)

University of Exeter Business School, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Dipak Ghosh

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

E.J. Levin

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

R.J. Limmack

University of Stirling - Department of Accounting and Finance ( email )

Stirling, Scotland FK9 4LA
United Kingdom
01786 467282 (Phone)
01786 467308 (Fax)

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