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I have been looking at the charts of highly traded instruments like SPY and AAPL in Yahoo Finance and have noticed that their volumes are generally higher at the start and the end of each trading day. That is, the graph of the volume against time in a day forms a U-shaped pattern, with occasional short-term volume spikes near noon.

I understand that at noon the human traders take a break for lunch and this might explain the low volume at the middle of the day, but I'm sure they don't have lunch all the time from 11 a.m. to 3 p.m.

Why is the volume higher between 9 and 11 a.m. and between 3 and 4 p.m. compared to the volume between 11 a.m. and 3 p.m.?

edom
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2 Answers2

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While volume per trade is higher at the open and to a lesser extent at the close, the overall volume is actually lower, on average.

Bid ask spreads are widest at the open and to a lesser extent at the close.

Generally, bid ask spreads are inversely proportional to overall volumes.

Why this is the case hasn't been sufficiently clearly answered by academia yet, but some theories are that

  • Liquidity providers in the option market have to rapidly resolve imbalanced dynamic hedges resulting from a gap between the previous day's closing price and the current day's opening price,
  • Imbalances from overnight trading in foreign markets between the price overseas and in the US provide a brief opportunity for spatial arbitrage,
  • Liquidity providers dynamically hedge at the end of the day in such a way to anticipate the price changes between today's close and the next open.
  • Day traders prefer to have no overnight exposure thus open positions after the open and close positions after the close,
  • Mutual funds are believed to trade near the close, but there doesn't seem to be sufficient evidence to support this,
  • and Traders randomly start and finish their days at different times which would not occur if trading were continuous, allowing volumes to be more constant.
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One of the fundamental of technical analysis suggests that holding a security overnight represents a huge commitment. Therefore it would follow that traders would tend to close their positions prior to market close and open them when it opens.

Pete B.
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