Understanding Over-the-Counter (OTC) Trading
Over-the-Counter (OTC) or off-exchange trading refers to transactions carried out outside of a standard trading platform, facilitated by intermediaries.
This mode of trading is often favored by private traders, as it commonly involves large transactions and provides more flexibility and advantageous pricing compared to exchanges.
Financial instruments like equities and cryptocurrency derivatives are among the assets that can be traded over the counter.
Over-the-Counter (OTC) | Source: Investopedia
Diverse Utility of OTC Trading
However, OTC trading isn’t exclusive to high-net-worth private traders.
It also holds significance in regions where, for instance, cryptocurrency exchanges are prohibited.
An additional reason for opting for an OTC route over a traditional exchange could be when the volume of the transaction is so substantial that it might influence the markets and the price of the involved cryptocurrency asset.
Moreover, over-the-counter trading is preferable when the traded assets aren’t listed on a standard exchange.
Consequently, the information about prices and volumes involved in OTC trades isn’t readily available to the public.
Two-Party Dynamics
It’s important to note that over-the-counter trades only involve two parties.
These parties don’t meet in person but use networks dedicated to OTC trading for interaction and transactions.
Over-the-counter trading plays a vital role in the global financial sector as it promotes liquidity and enhances trading flexibility.
Assessing Drawbacks
However, OTC trading has higher counterparty risks compared to formal exchanges.
This trading option may face low liquidity issues, especially with large trading volumes.
Furthermore, the lack of transparency regarding prices can result in uneven trading conditions.