Intraday Trading and Bid-Ask Spreads
Market liquidity is not uniform throughout the day. Extensive empirical research shows a consistent, U-shaped
pattern in bid-ask spreads for both NYSE and Nasdaq equities. 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.