This paper investigates and analyzes the intraday and daily determinants 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 t
o the BAS, whereas volatility in general is positively related to it. The s
tudy 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 adv
erse selection and the avoidance of the possibility of carrying undesirable
inventory overnight, respectively. Seasonal differences in BASs that are r
elated to the delivery date of a contract are also found. (C) 1999 John Wil
ey & Sons, Inc.