Say I have USD at Bitstamp but I need to pay someone who only accepts USD from WeExchange. A liquidity provider is someone who will accept USD from Bitstamp in exchange for USD from WeExchange. Using that liquidity provider, I can make my payment. If you tell Ripple that you equally value USD/Bitstamp and USD/WeExchange, whenever you hold one of them and are below your limit on the other, you act as a liquidity provider automatically and may find your balance shifting between issuers from time to time.