Why does the bid-ask spread vary over the day?

This paper shows that the findings of Chan, Christie and Schultz (Journal o f Business, 68, 1995) of no intraday variation in the average bid-ask sprea d is not general to all competitive markets, and in particular does not app ly to the London Stock Exchange during the mandatory quote period. This is important because it revives the possibility of explanations of intraday va riation in the bid-ask spread which involve individual market-makers wideni ng their individual spreads for example in response to informed trading, in elastic demand or the need to discover prices at the start of the day. Howe ver there is no evidence of individual market makers widening their bid-ask quote spreads during the warm up and cool down periods at the start and th e end of the trading day outwith the mandatory quote period. The only singl e explanation which might explain the whole day variation observed in the i nside and the average bid-ask spreads both inside and outside of the mandat ory quote is inventory control.