Everything You Need To Know About Over The Counter Trading

The most significant financial and cryptocurrency transactions happen via over-the-counter desks. These platforms are alternatives to exchanges and focus on high-volume trades, thus offering a range of opportunities.

Over the counter trading occurs directly between two parties via a dealer network. The most traded assets include commodities, stocks, derivatives, and cryptocurrencies. Yet, since OTC is not regulated, this creates a gap for risks you should be aware of. Let’s take a deeper dive into what OTC involves, along with the best practises and platforms.

What Does Over The Counter Trading Mean?

OTC markets are decentralized electronic networks with no physical location that operate beyond the supervision of exchanges. Any two parties can trade various assets directly or through middlemen, such as OTC desks and brokers.

Companies that engage in OTC trading are public but unlisted. Traders can buy and sell stock without listing it on a major exchange such as the NYSE. As a result, these equities are not subject to the rules imposed by stock markets.

OTC prices remain undisclosed in public until the trade is complete. Both the seller and the buyer propose a rate, and they can negotiate to find a middle ground. So, other market members have no means to find out the transition price point.

All OTC deals are bilateral, and parties may face credit risks due to lack of regulation and volatile price swings. Hence, many decide to work with a broker to negotiate and bear the risk on their behalf.

Who Can Use OTC Trading?

Over the counter trading is particularly favourable for smaller companies. In short, small-sized players that cannot pay the fees or meet the listing requirements of formal exchanges can resort to OTC trading.

Moreover, even successful companies and investors rely on OTC markets since they allow greater freedom and opportunities. For example, automobile giants Daimler, Volkswagen, and Mitsubishi exploit OTC trading. Other names that trade shares over the counter include Nestle and Bayer.

Finally, OTC trading is becoming increasingly popular in the crypto industry. Miners sell their profits, while institutional investors and hedge funds are among the top buyers.

Downsides of OTC Trading

As with other trading types, you run the risk of fraudulent activities by hackers and scammers. Hence, traders must do thorough research before engaging in sizeable deals. Here are some cons associated with over the counter trading.

  • Settlement risks. There is a lack of trusted custody solutions to mitigate operational risks. Traders still rely on bank transactions and escrow services to secure the invested money.
  • Low liquidity. Since OTC stocks are low volume, demand may not be high. In a word, it can often prove challenging to sell assets when you intend to.
  • No price transparency. Sellers can name one price to a buyer and charge another amount to another for the same security.
  • Anonymity leads to no oversight. OTC trading lacks regulation and hence is fertile soil for shady deals. Often, significant hacks result in OTC trading spikes.
  • High volatility. OTC stocks are subject to sharp price swings when economic data go public. Hence, they are highly unpredictable and prone to market manipulation.

Upsides of OTC Trading

Besides the drawbacks, over the counter trading has multiple benefits, too. Consider the following before reaching out for an OTC network.

  • Lower transaction fees. Costs on the OTC market are negligible compared to exchanges.
  • The future of trading. Buyers can invest in start-ups, foreign companies, and entities unable to list on major exchanges. Some estimates show that OTC trading platforms boast larger daily volumes than their formal counterparts.
  • Low-cost shares. Due to the lower prices than exchange-listed stock, your money can undergo fast turnover and give way to significant returns.
  • Privacy and anonymity. Most traders appreciate the personalized service they get from individual brokers without revealing their identity.

Over The Counter vs. Traditional Trading

Traders who prefer OTC trading over formal exchanges do so because of the privacy and high liquidity. In short, trading large amounts on exchanges will impact the market. Conversely, transactions via OTC desks are between two parties and don’t appear in exchange order books.

Moreover, the chances you get your order realized in one go at the preferred price are higher. More specifically, in OTC transactions, you strike a deal with one buyer. On exchanges, each party gets offers from each counterparty. Thus, many price perspectives and preferences come into play.

Last, placing a high-volume order on an exchange might force the market to move against you and push prices in an unfavourable direction. As opposed, OTC platforms allow you to get the best price for your assets and streamline the transaction.

What Are the Best OTC Practices?

If you wonder how to trade over the counter, here’s a detailed guide on how to start:

  1. Define the amount you want to invest in OTC stocks. It may be wise to consider these assets as more speculative and size your positions accordingly.
  2. Find a reliable OTC brokering platform. Ensure you’re dealing with a reputable over the counter trading desk. Most platforms operate online, but you can also take recommendations from trusted collaborators. Always check the website, background, and credentials of the desk you have in mind.
  3. Set your terms. Decide on the cryptocurrency, how much you expect to earn, and when. Buyers should also need to know how much they want to buy.
  4. Purchase the assets. The counterparty will give their rate, and you can start negotiating. The value can only get transferred after you reach a mutual agreement on the price.

What Platforms Does OTC Take Place On?

Over the counter trading can go through on several platforms, such as:

  • Trading firms. Besides offering personalized treatment, these entities specialize in large transactions. They prevent slippage by having access to vast sources of cryptocurrency liquidity.
  • Crypto brokers. OTC platforms such as NextHash are ideal for high net-worth traders with crypto assets. Thanks to NextHash, individuals, VCs, hedge funds, and institutions have access to a large share of buying and selling options.
  • Dark pools. These non-transparent markets are private and far from the eyes of the wider public. Due to the lack of order books, large investors can trade independently.