19 April 2022
OTC markets operate on electronic networks via computer software. The system allows two parties to trade various assets with the help of desks or dealer-brokers acting like intermediaries. As a result, the public also refers to these services as dealer networks.
Conversely, stock or crypto exchanges resemble auction markets. The seller posts the asking price for the asset, and the interested buyers or investors make offers, bidding against each other.
Unlike exchanges, OTC trading companies are public but unlisted. In a word, traders sell and buy assets openly, but there’s no listing on major exchanges. Hence, these equities don’t abide by the rules imposed on listed companies, and no governing institution monitors them.
So, how does OTC trading work? Which platform should you entrust with your valuable portfolio? This article reveals everything you need to know about over-the-counter markets and the accompanying perks of listing your assets on one.
As mentioned, over-the-counter stands for trading through decentralised dealer networks. When we say a decentralised market, we refer to a structure comprised of numerous technological devices. Thanks to this complex network, investors run a marketplace without a centralised location. So, no formal exchange gets involved in the process.
Unlike on-exchange trading, where different parties display multiple ask and bid prices, OTC involves only two figures: one buy and one sell price. So, two parties can execute an anonymous deal handled by a dealer. Due to the lack of strict regulations, investors enjoy enhanced opportunities. Still, some inherent risks are inevitable, too.
Overall, OTC trading is suitable for trading shares and currencies, including crypto. Other ﬁnancial instruments are also available for business. To do so, users must contact a dealer by telephone or electronically. Then, deals get executed via phone, email, or specialised computer networks.
Many OTC assets issued by small or middle-sized companies don’t meet the listing requirements of major exchanges. Since start-ups don’t trade in large quantities, they stay away from formal marketplaces. Plus, their shares (often called penny stocks) sell below the minimum threshold of $5.
Other OTC companies are larger but unregulated and with a higher risk profile. Finally, some businesses can’t afford or wouldn’t like to pay the high listing fees NASDAQ charges. Assuming they qualify, companies pay up to $163,000 for listing there.
Specifically, OTC markets facilitate the trade of various things. Here’s a non-exhaustive list of assets available on over-the-counter platforms:
• Debt securities,
• Financial instruments, including derivatives,
• Private contracts between parties. Among other agreements, these can include futures, options, and forwards, whose value depends on underlying assets, like stocks.
• Foreign currencies. Different nations’ money gets traded via Forex, an OTC currency exchange.
• American Depositary Receipts or bank certificates representing a definite number of shares of a foreign stock.
• Various cryptocurrencies, including Bitcoin, Ethereum, and Litecoin.
Over-the-counter desks don’t match buyers and sellers but act as dealers for members interested in trading assets. So, you probably wonder why you would need an agent. In short, OTC desks can execute trades not allowed or impossible on regulated exchanges.
Now, let’s discuss the question ‘how does OTC trading work’. The person who wants to buy or sell an asset is the market-maker. To begin the procedure, the initiator quotes the price at which they want to buy/sell the product, currency, or security. The desk trader will state the current rate based on market conditions, and you can accept or decline the offer. If you agree, the desk undertakes to deliver the requested assets at the agreed price. Hence, the intermediary has to source the deal for a slightly lower price to make a profit (so-called spread).
Over-the-counter trading allows the involved parties to stay anonymous. Besides, the deal particulars remain hidden from the public’s prying eyes. And although OTC markets are perfect for smaller companies, the OTC community is far from negligible. In addition, many corporations and organisations engage in off-exchange trading.
Now that we have explained the notion of ‘how does OTC trading work’, it’s time you choose a trading platform. Above all, each investor must consider the underlying features and fees. This step is vital since traders seek different functionalities to make an informed decision. When selecting, bear the following in mind:
• Transaction costs. Unlike formal exchanges, OTC market fees are lower and more manageable for growth companies.
• User-friendly platform. Most desks take pride in intuitive and user-friendly online platforms. The pace at which you understand the features and your first impression will tell you whether to stay on a particular platform.
• No regulations. OTC markets aren’t rigid, and though they observe specific rules, involved parties can trade any volume and seal deals on their terms.
• Anonymity. Secrecy is advantageous for whale investors who want to buy assets without attracting much attention. This way, they also avoid slippages.
• Asset prices. Affordable rates mean you can make a more significant OTC investment than with exchange-listed instruments.
• Personalised service. Though OTC market space is vast and anonymous, you get private treatment. Dealers strike more intimate relationships with traders based on mutual trust.
As a global cryptocurrency exchange, NextHash supports various asset trading. The platform hosts a vast network of crypto sellers and investors with an inventory of multiple cryptocurrencies at any given time. Plus, we enable fiat-to-crypto trading in addition to the standard crypto-to-crypto deals.
NextHash OTC operates 100% online and is a highly secure desk for digital securities. Users can access the platform from the navigation bar and start trading directly. Settlement times are quicker, and fees are more convenient than anywhere else. The KYC verification and password setup are the only things you need to complete before setting sails.