Over the counter or in short OTC trading is a non-regulated manner in which financial instruments are traded directly between two parties. In simple words, it is a direct trade between two parties without the supervision of an exchange. OTC trading was generally used by small companies who couldn’t enlist on a national stock exchange, but now it is even being used by big companies. It has become so popular that more and more people are opting for it, rather than conventional trading in formal stock exchanges. I am sure you are wondering why is it so popular? Then let me tell you a few reasons for it.
- OTC trading allows trading of non-standardized product which is not possible in exchanges. The formal exchanges only allow trading of standardized commodity or product, which doesn’t fit the requirement for some people.
- The OTC trading doesn’t need any intermediaries, and the securities are traded by broker-dealer network direct negotiation.
- Anonymity – suppose you want to buy or sell a big volume of stock, commodity or something else, if you do that through formal stock exchange then others will definitely know about it, which could lead to unfavourable circumstances. On the other hand, if you do it through OTC, no one will get a clue about it, excluding the parties involved of course.
OTC has been gaining severe popularity that it has even entered the cryptocurrencies market, and several platforms are giving their customers an OTC option. OTC trading in cryptocurrencies can be done via brokers or through chat rooms, it also reduces the chance of slippage while trading cryptos. Though it might be a good way of trading, it is still trading and with trading comes a significant amount of risk, and OTC is no exception.
Despite such benefits, big companies still do not opt for OTC because it doesn’t have the transparency like big stock exchanges. Though it can be considered one of its features, still, it is more than enough to wary the companies. Another reason is the chances of fraud that can happen while trading, as there is no supervision over the exchanges as the two parties are in direct trade, and if something goes wrong then you can’t really do much. OTC has its own share of pros and cons, so while deciding whether you should opt for it or not, do consider the risks, benefits and circumstances.