Carbon emission trading markets (CETMs) play a crucial role in the “dual-carbon” goals of achieving carbon peak by 2030 and carbon neutrality by 2060. Liquidity and price discovery are the two fundamental microstructural measures of the functioning of CETMs. Using daily trading data from four carbon emission trading (CET) pilot markets: Beijing, Shanghai, Hubei, and Guangdong: From 2013 to 2021, this paper empirically examines the impact of institutional investors on market liquidity and price discovery. Our findings demonstrate that institutional investors significantly enhance liquidity and strengthen the price discovery function of these CET pilots. This conclusion remains robust after addressing potential endogeneity issues through instrumental variable methods and conducting robustness checks. Mechanism analysis shows that institutional investors play dual roles in carbon markets: As intermediaries, they enhance market liquidity by boosting trading activity; As informed traders,they accelerate the incorporation of new information into carbon prices, reduce effective price dispersion, and thus strengthen price discovery. These findings carry important policy implications for the development of a national CETM and offer practical guidance for investors, carbon emission regulated enterprises and policymakers to better navigate and utilize CETMs.