An Intraday Analysis of Exchange Traded Fund Markets

This study provides an intraday analysis of Exchange Traded Fund markets. We investigate trading implications surrounding the open and close, and compare price discovery and liquidity in a multi-market trading framework. In addition, we test whether the difference of ETFs with regard to market maker inventory management causes intraday spread patterns to differ from those of the underlying securities. We find that despite the small market share of trading volume, the AMEX contributes most to price discovery in all trading periods, especially at the open and close. However, the AMEX also charges the highest transaction costs for investors. This result is consistent with the market power hypothesis. We also find that the intraday spread patterns of ETFs are different from those of the underlying securities. This discrepancy is attributable to the fact that market makers use a different device than spread to control their inventory. JEL Classification: G14; G18