18 November 2021
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.
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.
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.
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.
Besides the drawbacks, over the counter trading has multiple benefits, too. Consider the following before reaching out for an OTC network.
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.
If you wonder how to trade over the counter, here’s a detailed guide on how to start:
Over the counter trading can go through on several platforms, such as: