The Market Makers Program: Deepening Liquidity in Costa Rica

One of the most significant developments in Costa Rica's capital markets in recent years has been the implementation of the Market Makers Program. This initiative represents a strategic approach to addressing one of the fundamental challenges facing emerging markets: liquidity.

Understanding the Liquidity Challenge

Liquidity—the ability to buy or sell securities quickly without significantly impacting their price—is essential for well-functioning capital markets. Yet many emerging markets, including Costa Rica, have historically struggled with thin trading volumes and wide bid-ask spreads that discourage investor participation.

The consequences of illiquidity are significant. Investors demand higher returns to compensate for liquidity risk, increasing the cost of capital for issuers. Price discovery becomes less efficient, and market volatility increases. Ultimately, illiquidity constrains market development and limits the capital markets' ability to support economic growth.

The Market Makers Solution

The Market Makers Program, developed in collaboration with Costa Rica's Ministry of Finance, addresses these challenges through a structured approach. Market makers—typically financial institutions—commit to continuously quoting bid and ask prices for designated securities, providing liquidity even when natural buyers and sellers are absent.

This is not a new concept globally, but its implementation in Costa Rica required careful adaptation to local market conditions. We worked closely with regulators, the Ministry of Finance, and potential market makers to design a program that balanced incentives with obligations, ensuring that market makers could fulfill their commitments sustainably.

Program Structure and Impact

The program focuses initially on government securities, which form the foundation of any capital market. Market makers receive certain benefits—such as preferential access to primary auctions—in exchange for maintaining continuous two-way quotes within specified spread limits.

The results have been encouraging. Since implementation, we've observed narrower bid-ask spreads, increased trading volumes, and improved price discovery in covered securities. Perhaps most importantly, the program has attracted new investors who previously avoided the market due to liquidity concerns.

Lessons Learned

Implementing the Market Makers Program has provided valuable lessons applicable to other market development initiatives. First, successful market infrastructure requires collaboration among multiple stakeholders—exchanges, regulators, government, and market participants must work together toward shared objectives.

Second, program design matters enormously. Obligations must be realistic and sustainable, while incentives must be sufficient to encourage participation. We spent considerable time modeling different scenarios and consulting with potential participants to get this balance right.

Third, technology infrastructure is critical. Market makers need reliable systems for monitoring positions, managing risk, and executing trades efficiently. We invested significantly in upgrading our trading platform to support the program's requirements.

Future Directions

The Market Makers Program represents just one step in Costa Rica's capital market development journey. Looking ahead, we're exploring expansion to corporate securities, which could significantly enhance liquidity in the private sector debt market.

We're also examining how technology—particularly algorithmic trading and electronic market making—can further improve liquidity provision. The goal is to create a virtuous cycle where improved liquidity attracts more issuers and investors, which in turn deepens liquidity further.

Broader Implications

The success of Costa Rica's Market Makers Program offers lessons for other emerging markets facing similar liquidity challenges. While each market has unique characteristics requiring tailored solutions, the fundamental principles—stakeholder collaboration, careful program design, and robust infrastructure—are universally applicable.

Ultimately, programs like this are about more than just market mechanics. They're about creating the conditions for capital markets to fulfill their essential economic function: efficiently allocating capital to its most productive uses, supporting economic growth, and creating opportunities for investors and issuers alike.