Monday open spreads: the gap is only half of what the weekend changes

[Shadow Trader]

Price gapping 30 pips at the Sunday open is the part everyone sees. The spread is the other half, and it normalizes on a different schedule than the price does.

Picture the first few minutes. Liquidity providers do not all switch back on at the same instant. A few come online early, quote cautiously, and keep a wide cushion because nobody knows yet where the real market is. Others join over the next several minutes. The spread on the screen tends to step down in stages as each one returns, instead of sliding smoothly to normal. Staircase behavior on a spread logger is a fair sign that this is happening.

The bigger the gap, the longer that staircase usually lasts. A gap after weekend news, an election or a central bank surprise can keep spreads elevated far longer than a tiny gap on a boring weekend. The size of the gap is a decent proxy for how uncertain the quoting side still is.

There is also a trap in the other direction. A spread can look tight on the very first quotes simply because those quotes are sparse and stale. A tight number with a tick arriving every few seconds is not the same thing as a tight number with ticks flowing every fraction of a second. Tick frequency tells whether the quote is alive or just a leftover from Friday.

Pending orders sit in the middle of all this. Stops placed near the Friday close can fill on the gap at whatever price the first usable quote offers, which can be well beyond the stop level, and that fill happens at the widened spread as well. Some brokers also open trading a little after the first quotes appear, so the first tradable price may differ from the first displayed one, and this varies by broker.

A spread filter that blocks entries above a threshold works better on Monday if it also asks for a minimum tick rate over the last minute.

How long does it take for the spreads on the pairs traded here to settle on a normal Monday, and does a big gap stretch that much further?