Over The Counter (OTC) is a critical topic that every trader should be familiar with. The OTC market is organized by brokers and dealers who negotiate directly with one another. The OTC market has the advantage of allowing non-standard quantities of stock or shares to be traded. But, exactly, what is the OTC? Continue reading to find out.
What Is Over The Counter(OTC)
OTC, which stands for Over the Counter, is a growing method of trading stocks, bonds, derivatives, and currencies in both the cryptocurrency and fiat markets. Buyers, sellers, and the exchange are typically involved in currency exchange trading.
Bids are set by buyers, and requests are set by sellers (who act as the market maker). OTC trading eliminates the need for a middleman (the exchange), allowing buyers and sellers to communicate directly.
Over the counter (OTC) markets have seen an increase in cryptocurrency trading volume over the last year as brokers compete for the attention of institutional investors who have begun to enter the cryptocurrency market.
In most ways, the OTC Bitcoin market operates similarly to the global financial OTC markets. To meet the growing demand from both retail and institutional investors in the cryptocurrency space, major cryptocurrency exchanges have launched their own OTC trading desks.
It makes little difference how these parties interact because, unlike stock exchanges, over-the-counter markets are less formal and lack a physical presence. Buyers and sellers will typically connect through chat groups, phone calls, forums, and other means.
In some cases, securities might not meet the requirements to have a listing on a standard market exchange such as the New York Stock Exchange (NYSE). Instead, these securities can be traded over the counter.
However, over-the-counter trading can include equities that are listed on exchanges and stocks that are not listed. Stocks that are not listed on an exchange, and trade via OTC, are typically called over the counter equity securities, or OTC equities.
How OTC Works
Over the counter stocks are typically those of smaller companies that cannot meet the exchange listing requirements of formal exchanges. Many other types of securities, however, are also traded here. Stocks that trade on exchanges are known as listed stocks, whereas stocks that trade over the counter (OTC) are known as unlisted stocks.
Trade transactions can take place on OTC Markets Group’s electronic matching platforms, which include the OTCQX, OTCQB, and Pink Open Market (also known as OTC Pink or “Pink Sheets”).
Each of these platforms contains a progressively lower (i.e., riskier) tier of stocks from different companies. Stocks in the top tier of the OTCQX must meet a variety of eligibility requirements and contain shares of several foreign ADRs. The OTC Pink tier is the lowest, with far fewer stringent listing criteria and quality control.
OTC Securities
OTC equities are not limited to small businesses. The OTC markets are home to some well-known large corporations. The OTCQX, for example, trades ADR shares of large foreign corporations such as Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.3
OTC trading is common for American depository receipts (ADRs), which represent shares of a stock that trade in foreign exchange. Because the underlying company does not want to or cannot meet the stringent exchange requirements, shares trade in this manner. Furthermore, the $295,000 NYSE listing fee (up to $75,000 on Nasdaq) creates a barrier for many companies. 45
Bonds, for example, do not trade on a formal exchange because banks issue them and market them through broker-dealer networks. These are also classified as OTC securities. Banks save money on exchange listing fees by matching buys and sells from clients or another brokerage firm. Derivatives and other financial instruments are also traded through the dealer network.
OTC markets
Over the counter market is a network of companies that serve as a market maker for certain inexpensive and low-traded stocks, such as UK penny stocks. Stocks that trade on an exchange are referred to as listed stocks, whereas unlisted stocks are traded over the counter.
Although there are differences between OTC and major exchanges, investors should not see significant differences when trading. Because a financial exchange is a regulated, standardized market, it may be considered safer. It may also be viewed as facilitating faster transactions.
OTC Networks
Over the counter Market Groups operates several well-known networks, including the Best Market (OTCQX), Venture Market (OTCQB), and Pink Open Market.
Despite the fact that OTC networks are not formal exchanges like the NYSE, they do have eligibility requirements. For example, the OTCQX does not list stocks that trade for less than $5 (known as penny stocks), shell companies, or companies in bankruptcy.
The OTCQX Best Market includes securities from companies with the largest market capitalizations and the most liquidity compared to the other markets.
Through over the counter marketplaces, you can find the stocks of companies that are small and developing. Depending on the listing platform, these companies may also submit reports to the Securities and Exchange Commission (SEC) regulators. OTCBB stocks will usually have a suffix of “OB” and must file financial statements with the SEC.
Pink Sheets is another trading platform, and these stocks come in a wide variety. These companies do not meet the SEC’s requirements. While these shares may have lower transaction costs, they are vulnerable to price manipulation and fraud. These stocks are typically denoted by the suffix “.PK” and are not required to file financial statements with the SEC.
Are OTC Markets Ideal For Crypto Traders?
When dealing in OTC markets, liquidity is critical. Limited liquidity is the norm on cryptocurrency exchanges. Buying cryptocurrencies through OTC marketplaces reduces risk by reducing the possibility of price slippage.
However, exchanges frequently fail when dealing with large orders. As a result, in order to make the transaction feasible, they divide it into smaller chunks. As a result, purchasing a large number of cryptocurrencies at a fixed price is difficult for buyers.
Users are interested in the freedom of anonymity. It is possible to obtain a large number of coins without significantly affecting the price. Furthermore, exchange desks only allow direct trades, with restrictions on certain trades that exchanges prohibit.
Most major exchanges allow the purchase and sale of many lesser-known cryptocurrencies. Investors can obtain large quantities of unknown coins as long as they are purchased privately through OTC (over-the-counter) marketplaces.
How OTC Grows Opportunity For Smaller Companies
A person seeking a trade (either buyer or seller) serves as the market-maker in the transaction by stating the prices at which they wish to buy/sell security, money, or financial product. They can remain anonymous because they are not required to reveal the details of the transaction to the public.
When a company is too small to be listed on a formal exchange, its shares are typically sold on the over the counter (OTC) market. However, the fact that small businesses use the over-the-counter market does not imply that the market is small; in fact, the opposite is true.
Conclusion
Over the counter (OTC) refers to the process of trading securities through a broker-dealer network rather than a centralized exchange. Over-the-counter trading can include equities, debt instruments, and derivatives, which are financial contracts whose value is determined by an underlying asset such as a commodity.
