Over-the-Counter (OTC)

Understanding Over-the-Counter (OTC) Trading

Over-the-Counter (OTC) trading, also known as off-exchange trading, is a method of conducting transactions outside of traditional trading platforms with the help of intermediaries. This type of trading is popular among private traders because it allows for large transactions and offers more flexibility and pricing advantages compared to exchanges. It is commonly used for trading financial instruments like equities and cryptocurrency derivatives.

OTC trading is not limited to wealthy individuals. It is also prevalent in jurisdictions where cryptocurrency exchanges are prohibited. Another reason why traders choose OTC trading over regular exchanges is when the transaction amount is significant enough to impact the markets and the price of the involved crypto asset.

Furthermore, over-the-counter trading is well-suited for instruments that are not listed on conventional exchanges. As a result, the prices and quantities involved in OTC trades are not easily accessible to the public.

It is important to note that over-the-counter trades involve only two parties, even though they do not physically meet. Instead, they use OTC-specific networks to connect and conduct trades. Over-the-counter trading plays a vital role in the global financial sector as it enhances liquidity and trading flexibility.

Despite its advantages, OTC trading carries higher counterparty risks compared to formal exchanges. When large trading amounts are involved, there may be low liquidity in OTC trading. Additionally, the lack of price transparency can create an uneven trading environment.

Information sharing on OTC networks occurs through electronic listing services such as the OTC Bulletin Board (OTCBB). Some examples of OTC networks that deal with Bitcoin and other cryptocurrencies include Coinbase Prime, Kraken OTC Desk, BitBay OTC, and Bitpanda Plus.