The Journal of Futures Markets, Vol. 19, No. 3, 307–324 (1999)
ᮊ 1999 by John Wiley & Sons, Inc. CCC 0270-7314/99/030307-18
The Determinants of
Bid-Ask Spreads in the
DAVID K. DING*
This paper investigates and analyzes the intraday and daily determi-
nants of bid-ask spreads (BASs) in the foreign exchange futures (FXF)
market. It is found that the number of transactions and the volatility
of FXF prices are the major determinants. The number of transactions
is negatively related to the BAS, whereas volatility in general is pos-
itively related to it. The study also ﬁnds that there are economies of
scale in trading FXF contracts. The intraday BAS follows a U-shaped
pattern, and they tend to be higher on Mondays and Tuesdays than
on other days of the week. Higher spreads at the beginning and end
of a trading day are consistent with the presence of adverse selection
and the avoidance of the possibility of carrying undesirable inventory
overnight, respectively. Seasonal differences in BASs that are related
to the delivery date of a contract are also found. ᭧ 1999 John Wiley
& Sons, Inc. Jrl Fut Mark 19: 307–324, 1999
The author gratefully acknowledges the helpful comments of the editor and two anonymous referees.
*Correspondence author, Division of Banking and Finance, Nanyang Business School, Nanyang
Technological University, Singapore 639798, Singapore.
David K. Ding is Associate Professor and Head, Division of Banking and Finance,
Nanyang Technological University, Singapore.