Heterogeneous Liquidity Providers During Price Jumps

Abstract

Using audit trail data from the Taiwan Stock Exchange, we compare how institutions and individuals offer liquidity during price jumps. Consistent with risk-return trade-off models, we find that offered liquidity is increasing with jump size (i.e., strategic liquidity provision) for all groups of traders, especially for individuals followed by domestic institutions. Reducing order matching intervals increases strategic liquidity provision by institutional traders, especially foreign institutions, while decreasing it for individuals, indicating that higher matching frequency encourages (discourages) strategic liquidity provision by institutions (individuals). During cojumps and extreme price jumps, institutions are more willing to offer liquidity strategically than individuals, suggesting that institutions are better equipped to maintain stability during periods of high inventory risk.

Keywords: Liquidity, Liquidity provision, Price jumps, Investor heterogeneity, Trader types G10, G11, G12, G14

JEL Classification: G10, G11, G12, G14