Periodic Market Closure and Trading Volume: A Model of Intraday Bids and Asks

This paper examines the effect of periodic stock market closure on transactions demand and volume of trade, and consequently bid and ask prices. We extend Merton (1971) to show that transactions demand at open and close is greater and less elastic than at other times of the trading day. In response, a market maker such as an NYSE specialist may effectively price discriminate by charging a higher price to transact at these periods of peak demand. Our predictions of periodic demand with high volume and concurrent wide spreads are consistent with empirical evidence, while the predictions of current information based models are not.