Intraday Trading and Bid-Ask Spreads

Every listed security quotes two prices at once: the bid, the highest price a buyer will currently pay, and the ask, the lowest a seller will accept. The gap between them — the bid-ask spread — is the price of immediate execution, collected by the market maker who bridges the two sides. Market liquidity is not uniform throughout the day. Spreads follow a stable intraday shape — wide at the open, compressing through midday, unsettled into the close — documented for NYSE equities by McInish and Wood, who found the minute-by-minute pattern closer to a reverse J than the clean U it is usually drawn as.¹¹⁶ Spreads are widest during the first 30 minutes after the market open, as market makers absorb overnight information and demand higher risk premiums. Spreads narrow during midday trading as volume stabilizes, and may widen or experience extreme volatility in the final minutes before the close, driven by institutional rebalancing.

Practical Trading Guidelines

To minimize transaction frictions:

• Avoid placing market orders during the first 30 minutes of the trading day. If you must trade near the open, use limit orders to insulate yourself from temporary spread spikes.
• For large-scale index products (like the all-world equity ETF VT), market orders during core midday hours are generally acceptable for retail-sized positions due to deep, continuous liquidity.
• For less liquid assets, municipal bonds, or mid-to-small-cap equities, always use limit orders.
• Avoid low-tier retail brokerages that monetize flow via aggressive internal routing without price improvement. Opt for institutions that provide direct market access (DMA) and transparent order routing.