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Stock Splits , Liquidity and Limit Orders

We use non-public NYSE system data to study the effect of stock splits on liquidity by documenting changes in the limit order book, execution costs, and trading activity. We find that depth available in the limit order book at various dollar distances from the mid-quote increases after a stock split, but the depth available at various percentage (split-adjusted) distances declines substantially. In general, we observe a slight increase in the use of limit orders rather than market orders, and fill rates are largely unchanged. Consistent with these results, the realized execution cost (in percent) of limit orders declines dramatically while the realized execution cost for market orders increases. Overall, despite a 10 basis point increase in the proportional effective half-spread, we find little evidence of a change in execution costs across all orders. Finally, while trading activity generally declines following stock splits, we observe a substantial increase in the number of submitted orders, an increase in the proportion of trading volume that originates from individuals, and an increase in market buys by individuals.