Abstract: In recent years, financial markets have experienced several crisis events. The US stock market crashed on May 6, 2010. The Chinese stock market suffered the price collapse in June 2015. The occurrence of these events due to the exhausted liquidity. Hence, liquidity supply is an important factor affecting market price efficiency. A sufficient and stable supply of liquidity can ensure the sustainability of the market price discovery process, while the lack of liquidity supply will hinder the transaction process, even result in price deviations and abnormal fluctuations. Although existing researches point out the importance of liquidity to price efficiency and the harm of liquidity shortage, there is barely literature concerning on the relationship between liquidity supply and price efficiency in Chinese stock market.
In the perspective of market microstructure, effective ways are explored to improve intraday price efficiency using the contrarian trading ratio as the intraday liquidity provision. Considering the informed trading and market conditions, the moderating effect of institutional trading and price fluctuation is investigated to liquidity provision and price efficiency.
In the conclusions of this paper, liquidity supply is an important factor affecting intraday price efficiency, and higher liquidity supply can significantly improve price efficiency. In terms of information trading, institutions are strategic and informed traders. Increasing the proportion of institutional transactions is positively promoting the relationship between liquidity supply and price efficiency. In terms of market status, stock price fluctuations measure the heterogeneous beliefs of the market to some extent. When the fluctuation is large, it is not conducive to the integration of market information and the effective recovery of price. Therefore, the lower price fluctuation has a positive effect on the relationship between liquidity supply and price efficiency.
A new perspective for improving intraday price efficiency is provided, benefit to policy-making and investment decision. A certain contrarian trading ratio guarantees the liquidity supply of the market, while the continuous and stable liquidity supply helps not only the market price efficiency during the normal trading period, but also the extreme liquidity demand during the crisis period, thus improving the market quality. At the same time, high-frequency traders can capture short-term momentum or reverse earnings by capturing the imbalance of intraday trading and developing a homeopathic or contrarian trading strategy as needed.

Key words: liquidity provision, price efficiency, high frequency trading, market microstructure