Why does a stock split increase liquidity?

There are several effects from a traditional stock split:

A stock split increases the number of shares in circulation thereby increasing liquidity which facilitates more trading which in turn tends to narrow the bid-ask spread.

Higher liquidity may also attract traders which may increase volatility.

Reduced share price also attracts new investors who might have felt that the pre-split price was too high.

When combined, all of these factors increase trading volume.

Back when the lowest fees were when you bought in round lots of 100 shares, then the raw stock price was important or you would price certain investors out of the market.

Then the price break disappeared. Meanwhile raw share prices went though the roof as the market boomed.

According the Wall Street Journal:Tiny ‘Odd Lot’ Trades Reach Record Share of U.S. Stock Market :

Throughout the 20th century, the average price of a U.S. stock hovered around $35, with companies splitting their stocks if they grew much higher. That meant a single round-lot trade of 100 shares used to cost the buyer about $3,500.

By comparison, buying 100 shares of Amazon today costs more than $170,000—a heavy lift even for a big investor. The online-shopping company isn’t alone in its stratospheric share price. In 2012, no companies in the S&P 500 traded above $1,000 a share. Now there are five: Amazon, Google parent Alphabet Inc., online-travel company Booking Holdings Inc., car-parts retailer AutoZone Inc. and home builder NVR Inc.

Now today many individual investors can buy a fraction of a share. I have seen advertisements that offer the ability to buy a slice as small as $5 of one of the FAANG companies.

This would mean that a major need for a split has gone away.

But it still drives positive news. We had a bunch of questions on this site asking about the mechanics of a split, and how best to take advantage of a split in the last few weeks because Tesla and Apple were splitting. Remember the P/E ratio doesn't change because of the split. Yet some people want to buy a stock because of the split news.

The desire to buy because of the news, means that even more shares trade hands.