Over-the-counter (OTC) is also called over-the-counter trading, which refers to trading activities that are not conducted through a central exchange. OTC transactions are conducted directly between buyers and sellers on a one-to-one basis, and generally do not require third-party supervision. In the financial market, the types of "subject matter" traded can be very wide, including securities, bonds, currencies, various commodities, etc., which can all be processed through OTC transactions. Since a fixed trading venue is not necessarily required, it means that the OTC market is an invisible market. With the advancement of information technology, the way traders communicate with each other has also changed, from the original telegraph, telephone, etc., to the current network system that handles all daily transactions. Brokers inquire or quote prices from other brokers or their own customers through electronic trading platforms.
Because on-exchange transactions are conducted in a central exchange, they are open and transparent, and the types of transactions are also regulated, and the traded commodities must be standardized contracts. However, over-the-counter transactions are open, and the traded commodities can be quite diverse. Without the framework of the exchange, non-standardized contracts can be traded, including securities, commodities, and foreign exchange, and the forms can be options, forward contracts, swaps, and other non-standardized financial derivatives.
OTC trading is more flexible. As long as there is liquidity, buying and selling do not need to be coordinated with the opening and closing times of the central exchange. Therefore, many mainstream OTC products can be traded up to 24 hours a day.
In addition, there are many participants in the OTC market, including enterprises, securities dealers, fund companies and large and small investors, without the need for specific identities. The OTC market composed of many participants has indirectly promoted liquidity and improved the transparency of OTC prices.
Most OTC transactions are not directly supervised by relevant government agencies, allowing the two parties to negotiate directly without disclosure. As a result, information asymmetry and price opacity may occur during transactions, so it is common for the transaction price to be inconsistent with the market price. In order to protect the general public and ensure that OTC transactions do not cause any chaos, some countries and governments have established some regulatory agencies to implement regulations in another way to allow the OTC market to develop in an orderly manner.
Dark pool trading, which is also commonly heard in the financial market, is also a type of over-the-counter trading. It mainly allows some large or institutional investors to trade anonymously outside the central exchange. In addition to reducing some unnecessary price volatility on the exchange, the dark pool trading platform can also facilitate matching in light trading market conditions, providing new liquidity for buyers and sellers.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.