Examining Intraday Fixed Income ETF Liquidity: Is it More Expensive Near the Open?

Abstract

In this article, the authors analyze the relationship between time of day and bid-ask spread for US-domiciled fixed income exchange-traded funds (ETFs) with US dollar exposure. They aggregate millions of national best bid and offer (NBBO) spread data points into 168,324 sample observations according to 166 ETFs over 78 intra-day time intervals across 13 calendar quarters. The authors find that both before and after they add controls, average spreads are highest in the morning, supporting the argument that investors trading on the basis of NBBO spreads should avoid trading near market open. After falling from morning peaks, spreads generally flatten out the rest of the day, even after adding controls. Therefore, the analysis does not support the argument that investors should systematically avoid trading US fixed income ETFs near market close.

TOPICS: Exchange-traded funds and applications, fixed-income portfolio management

Key Findings

• • Average spreads are highest in the morning before and after adding a battery of variables, supporting the argument that investors trading on the basis of national best bid and offer (NBBO) spreads should avoid trading US fixed income ETFs near market open.

• • After falling from morning peaks, spreads generally flatten out the rest of the day, contradicting the argument that investors should systematically avoid trading US fixed income ETFs near market close.

• • Our findings do not negate other trading best practices such as using limit orders, consulting a block desk for large orders, and not trading during the open and/or closing auctions.