Over-the-Counter (OTC) Market

The Over-the-Counter (OTC) market is used by many large companies to make transactions for the purchase and sale of assets outside exchanges and platforms. In this case, a direct purchase/sale transaction is concluded between the buyer and the seller.

Negotiations between the parties can take place either through specialized platforms or services, or through a direct meeting of representatives. Such interaction makes it possible to achieve optimal transaction terms, but at the same time reduces the transparency of market mechanisms. The formation of the transaction value takes place with the participation of two parties, which may affect the accuracy of its calculation.

To prepare a deal, the buyer may involve a broker or a trader specializing in over-the-counter trading.

In this case, the broker requests current prices for the asset of interest from several counterparties. Since there is no centralized exchange to consolidate these quotes, the resulting order book, pieced together from scattered counterparty offers, can contain significant inaccuracies.

After receiving the conditions from the broker, the trader personally reviews the main conditions, such as the value of the asset, the proposed volumes, terms and conditions of settlements.

After selecting a seller / sellers, the trader independently or with the help of a broker proceeds to the stage of concluding a contract or agreement. When all the conditions are agreed and the documents are signed, it’s time to pay for the asset and deliver it directly.

Disadvantages of the Over-the-Counter (OTC) Market

The trade-off for potentially more favorable terms on the OTC market is the lower transparency of this system. Government regulation of such activities is significantly limited, and therefore companies’ financial reports may be limited or completely absent. Such conditions increase the risk that a counterparty’s financial troubles or fraudulent intentions go undetected until it is too late, as well as fraudulent actions of both buyers and sellers.

In addition to classic assets, other assets can be sold on the Over-the-Counter (OTC) Market, such as:

• Forwards, swaps, and options transactions that can be combined into the derivatives market.
• All bonds that are not sold through specialized exchanges.
• Currency markets, such as Forex, where currency pairs are traded without the participation of a centralized exchange.
• Most cryptocurrency transactions.