A Taxonomy of Individual Liquidity Provision : Evidence from the Taiwan Stock Exchange

Using trade-level data from the Taiwan Stock Exchange, we document an asymmetric pattern of liquidity provision by individual investors who serve as de facto market makers. Specifically, individual investors, on average, provide more liquidity during market downturns. We further investigate the impact of asymmetric individual liquidity provision on market efficiency. Though being uninformed, individual investors’ liquidity provision ameliorates market efficiency more during market downturns, especially for large firms and firms with less retail trading proportion. Our results suggest that individual investors provide liquidity to help those with private information correct prices towards efficient prices, in turn, enhancing market efficiency