What Is Over-the-Counter (OTC)?
Over-the-Counter market transaction is a transfer made external to an exchange, normally peer-to-peer (P2P) via private trades. Also known as off-exchange trading, over-the-counter denotes a transaction done outside a conventional trading venue via assistance from intermediaries. Generally, private traders give preference to OTC trading as it usually takes into account enormous transactions and provides additional flexibility as well as improved pricing as compared with that which the exchanges can offer. Cryptocurrency derivatives and equities are included in the financial tools that can be traded over the counter.
A Wide Method for Undermined Securities’ Trading
Sometimes, it comes to pass that the need to obtain a listing from some regular market exchange – i.e., New York Stock Exchange (NYSE) – is not fulfilled by the securities; that is when the over-the-counter trading can be done through the individual securities. Nonetheless, the equities to which the listing on some prominent platforms is awarded can also be traded over the counter. Apart from that, the stocks, having not been listed on some exchange and traded through OTC, are commonly dubbed OTC equities or over-the-counter equity securities.
The concept of OTC is not restricted to rich private traders, and it is additionally famous in the jurisdictions known for putting a prohibition on cryptocurrency. Another cause at the back of utilizing an OTC method rather than a regular exchange is when the involved amount is considered essential, so much so that the price and the markets of crypto assets might get influenced by this.
Over-the-counter trading occupies a chief position in the financial sector across the globe as it escalates the liquidity along with bringing enhancement to the flexibility. In addition, over-the-counter is perfect in a place where the traded instruments are not listed on some traditional exchange. Thus, quantities and prices within the OTC trades cannot be automatically reached by the public. It is noteworthy that over-the-counter types of trades deal with two entities. Nonetheless, the meeting of the traders is not physical. Instead, they utilize OTC-related networks for this purpose as well as trading.
Drawbacks of OTC
Notwithstanding the benefits, some extreme counterparty-related hazards are undergone by OTC trading compared with the formal exchanges. The option of trading may get undermined due to low liquidity at a point when there is an involvement of greater trading amounts. In addition to this, the absence of transparency in terms of prices paves the way toward uncertain trading grounds.
Sharing of information on OTC networks is processed using electronic listing facilities like the OTC Bulletin Board (OTCBB). Instances of OTC networks that deal in Bitcoin (BTC) and the rest of the cryptocurrencies take into account Bitpanda Plus, BitBay OTC, Kraken OTC Desk, and Coinbase Prime.
Within the sector of financial trading, the place of an over-the-counter market is that of a market in which the trading of financial securities is done via a broker-dealer network, contrary to a financial exchange (usually considered centralized and exchange trading). On the other hand, decentralization is the core aspect of an over-the-counter market as it is among just a couple of bodies.