Tick Size, Share Prices, and Stock Splits

Abstract

Minimum price variation rules help explain why stock prices vary substantially across countries and other curiosities of share prices. Companies tend to split their stock so that the institutionally mandated minimum tick size stays in the optimal percentage range of stock price. A larger tick size increases incentives for dealers to make markets and for investors to provide liquidity through placing limit orders, although at a cost of an increased minimum bid-ask spread. A simple model demonstrates the correlation between firm size and share price. A minimum price variation of $.01 in the U.S. could eventually lead through stock splits to an average share price around $3.00.

JEL Classification: G10, G15, G30