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What is Over-the-Counter? Explanation for Beginners

Updated 2023-09-25 14:48:48

New trading techniques have arisen to accommodate the different needs of investors and traders in the fast-paced and ever-changing crypto ecosystem. Over-the-Counter (OTC) trading is one such technique that provides an alternative to regular exchange-based trading. OTC trading has grown in popularity in the crypto market, offering participants greater flexibility, secrecy, and customized services. In this article, we will delve into over the counter markets trading, its definition, its use in the cryptocurrency sector, and the numerous types of securities that can be traded over the counter. Furthermore, we will examine the benefits and drawbacks of OTC trading, highlighting its significance in the increasing world of digital assets. Readers will thoroughly understand OTC trading and its impact on the cryptocurrency market by the end of this article.


What is Over-the-Counter (OTC)?

OTC is a type of trading that doesn't require the use of centralized exchange

Over-the-Counter (OTC) trading is a type of direct trade between two parties that does not use a centralized exchange. Unlike traditional businesses, which use an order book to match buy and sell orders, OTC trading occurs through a decentralized network of brokers, dealers, and market makers. This decentralized method allows for more flexibility and customization in transaction execution.

Buyers and sellers discuss the trade details directly with each other in OTC trading, including the price, quantity, and settlement arrangements. This negotiation process allows participants to conduct trades that would otherwise be impossible or undesirable on traditional exchanges due to trade size or the need for secrecy.

OTC trading is not restricted to a single financial market but is frequently used across various asset types, including equities, bonds, derivatives, foreign currencies, and cryptocurrencies. It allows users to access liquidity, conduct huge trades, and benefit from customized services tailored to their trading needs.

OTC in Crypto Currency

Over-the-Counter is suitable for many cases in crypto trading

Over-the-Counter (OTC) trading has evolved as a popular technique for exchanging digital assets as the cryptocurrency market grows and matures. In the cryptocurrency world, OTC trading refers to the direct exchange of cryptocurrencies between buyers and sellers outside regular exchange systems. This approach is designed to meet the unique needs of institutional investors, high-net-worth individuals, and large-scale traders who require liquidity, secrecy, and personalized services.

High Volume Deals

The ability to make large-volume deals with minimum market impact is one of the critical reasons for the prevalence of OTC trading in the crypto market. When big orders are placed, cryptocurrencies such as Bitcoin and Ethereum are recognized for their significant volatility and liquidity issues on traditional exchanges. OTC trading overcomes these constraints by providing participants with access to large pools of liquidity, allowing them to conduct large trades without disrupting the market or generating significant price swings.

Privacy Concerns

Furthermore, when compared to exchange-based trade, OTC trading provides greater privacy. OTC transactions allow users to carry out buy and sold directly, negotiate and execute trades in the crypto arena, where privacy and security are paramount. This appeals to institutional investors and high-net-worth individuals who value discretion and wish to avoid the potential market impact of trading on public exchanges.

Customized services

OTC cryptocurrency trading also provides participants with the benefit of customized services. OTC desks and brokers give traders personalized support, market knowledge, and tailored pricing based on their needs. This degree of customized attention attracts institutional clients looking for specialized knowledge, help with complex trades, and access to rare investment possibilities.

Wide variety of cryptocurrencies

Furthermore, OTC trading might give a solution for those who want to trade cryptocurrencies that are not easily available on standard exchanges. Certain coins or digital assets may have limited liquidity or fail to meet major exchange listing standards. OTC trading gives participants access to more cryptocurrencies, making it easier to trade specialized or emerging digital assets with considerable value.

5 types of OTC Securities

Beyond cryptocurrencies, Over-the-Counter (OTC) trading includes a diverse spectrum of securities. Let's take a look at the five most frequent categories of OTC securities:

1) Stock

Stock - 5 types of OTC Securities

Stocks on the OTC market are shares of firms that are not traded on major exchanges which are like the New York Stock Exchange (NYSE) . These are sometimes known as "over-the-counter stocks" or "penny stocks." OTC equities are typically traded through the OTC market, a decentralized broker-dealer network. Companies listed on the OTC market are frequently smaller businesses, start-ups, or foreign firms that must match the requirements for significant exchange listing. OTC stock trading allows investors to trade shares of these companies, thereby providing chances for development and diversification.

2) Cryptocurrency

Cryptocurrency - 5 types of OTC Securities

Cryptocurrencies have emerged as a significant asset class in the OTC market. Buyers and sellers can trade digital assets directly through OTC cryptocurrency trading, circumventing the typical exchange order book. This strategy benefits large-scale transactions in which participants want privacy, liquidity, and personalized trading services. OTC cryptocurrency trading allows market participants to purchase and sell cryptocurrencies Bitcoin, Ethereum, and other altcoins with greater flexibility and the ability to execute trades at negotiated pricing.

3) Foreign Currency

Foreign Currency - 5 types of OTC Securities

Another important component of the OTC market is foreign currency trading, usually known as Forex or FX trading. OTC foreign currency trading is the direct exchange of currencies between two parties that does not require a listing on an organized securities exchange. OTC Forex market participants can trade a variety of currency pairs, including major currencies such as the US dollar (USD), Euro (EUR), Japanese yen (JPY), and others. OTC Forex trading provides market players with access to a broader selection of currencies and the ability to conduct transactions that would otherwise be unavailable through conventional securities exchanges. It offers flexibility in terms of trading hours and deal size customization.

4) Bonds

Bonds - 5 types of OTC Securities

Bonds are debt securities issued by governments, municipalities, and companies traded over the counter. Participants in OTC bond trading can negotiate and customize bond terms such as interest rates, maturity dates, and payment schedules. This adaptability attracts institutional investors looking for customized investment options. Government bonds, corporate bonds, municipal bonds, and other fixed-income instruments can all be traded over the counter. Direct transactions, customized pricing, and the flexibility to access bonds other than those listed on centralized exchanges benefit market participants in the OTC bond market.

5) Derivatives

Derivatives - 5 types of OTC Securities

Derivatives are financial products whose value is defined by the value of an underlying asset. OTC derivatives trading includes two parties entering into customized contracts that allow them to manage risks or speculate on the future value of an asset without trading the asset itself on a regulated exchange. Options, futures, swaps, and other sophisticated financial instruments are examples of OTC derivatives. Contract conditions, including the underlying asset, expiration dates, strike prices, and settlement arrangements, can be tailored by market participants in the OTC derivatives market. OTC derivatives provide flexibility but introduce counterparty risk, necessitating strict counterparty screening and risk management methods.

Pros of Over-the-Counter

3 Pros of Over-the-Counter

Over-the-Counter (OTC) trading provides various benefits to participants, making it an enticing option for some investors and dealers. Let's look at some of the main advantages of OTC trading:

Better Privacy and Security

Many market participants, particularly those in finance, are concerned about privacy. When opposed to exchange-based trading, OTC trading gives greater privacy. Participants can direct trades with counterparties without disclosing their trading techniques, positions, or intentions to the public. This additional privacy may be incredibly tempting to institutional investors and high-net-worth individuals who value discretion and want to keep sensitive information private.

Aside from privacy, OTC trading can boost security. Because transactions take place directly between the people involved, they are less vulnerable to potential cybersecurity risks or hacking incidents that can affect centralized exchanges. Participants can limit the danger of unlawful access to their digital assets and preserve better control over their investments by avoiding these intermediaries.

Liquidity for Large Trade

One of the most significant benefits of OTC trading is the availability of liquidity for large trades. Traditional exchanges frequently limit the size of orders that can be completed without materially affecting market pricing. OTC trading circumvents this barrier by directly connecting buyers and sellers, allowing them to perform large trades without creating significant price swings. This liquidity is essential for institutional investors and large-scale traders who must make large-volume trades without disrupting the market.

Furthermore, OTC trading allows for trade size flexibility. In contrast to exchange-based trading, which frequently enforces minimum trade sizes, OTC trading will enable parties to negotiate and execute trades of varying sizes, allowing for smaller and more significant transactions.

Custom Services and Pricing

When opposed to regular exchange-based trading, OTC trading provides participants with a higher level of customization and personalized services. Market makers and brokers in the OTC market offer specialized assistance, market knowledge, and personalized pricing based on particular needs. This personalized approach appeals to institutional investors, high-net-worth individuals, and large-scale traders looking for customized help, expert counsel, and access to exclusive investment opportunities.

Furthermore, participants in OTC trading can directly negotiate rates with counterparties, allowing for more flexible pricing arrangements. This capacity to negotiate pricing terms can help you get better pricing and optimize your trading methods.

Cons of Over-the-Counter

3 Cons of Over-the-Counter

While OTC trading has various advantages, it is crucial to examine the potential pitfalls and obstacles involved with this way of trading. Let's look at some of the disadvantages of OTC trading:

Counterparty Risk

Counterparty risk is a major concern in OTC trading. OTC trades are direct transactions between two parties, as opposed to trading on regulated exchanges, where transactions are processed and resolved by a centralized clearinghouse. Because of the direct nature of OTC trading, participants are exposed to the risk of default by their trading counterparty.

Before engaging in OTC trades, participants must thoroughly analyze the creditworthiness and dependability of their trading partners. Due diligence, risk management methods, and relationships with reputable brokers or market makers are critical in limiting counterparty risk. Furthermore, the lack of transparency in the OTC market can make assessing the creditworthiness and financial stability of potential counterparties difficult.

Absence of Transparency

The OTC market lacks the transparency and regulatory monitoring given by centralized exchanges when compared to standard exchange-based trade. OTC trading are decentralized and may lack rigorous reporting requirements. As a result, players may have limited visibility into market prices, trading volumes, and historical data, making it difficult to receive accurate and up-to-date information.

The lack of transparency in the OTC market may result in information asymmetry among market players. Market participants may have varying amounts of information availability, which can affect pricing and bargaining strength. To make informed trading selections, players must undertake thorough research, create trustworthy networks, and rely on reputable sources of information.

Difficulty of Access

OTC trading is mostly available to institutional investors, wealthy individuals, and large-scale traders. Due to variables such as high entrance barriers, minimum trade sizes, and eligibility restrictions, retail investors may find it difficult to gain access to the OTC market. The specialist nature of OTC trading, as well as the requirement for significant funds or experience, can limit retail investors' participation.

Furthermore, the OTC market's lack of defined procedures and regulations might make it more difficult for ordinary investors to navigate and assure fair and transparent trading practices.


To summarize, while OTC trading has distinct advantages, participants must carefully weigh the high risks and benefits and make informed decisions based on their personal circumstances. The particular criteria and conditions for each OTC status tier may vary as the OTC market evolves. To make educated judgments, investors and market players should stay up to date on the newest OTC trading legislation and guidelines. OTC trading, with due diligence and risk management, can be a helpful tool for market players seeking liquidity, privacy, and customized trading experiences in the expanding environment of digital assets.