Over-the-Counter Market
Candlefocus EditorThe Over-the-Counter (OTC) market is a decentralized global marketplace where transactions happen directly between participants without the use of a central exchange. OTC markets do not have physical locations or market makers. In OTC trading, brokers or dealers trade directly with each other to provide liquidity, and the trades take place via electronic communications networks or so-called “alternative trading systems”.
The OTC markets are often used by large corporate and institutional investors, who wish to buy or sell securities and derivatives. OTC markets lend businesses the ability to interact with counterparties in a large, global pool of buyers and sellers, and with the confidentiality to maintain privacy and anonymity.
In OTC markets, the prices are determined by a combination of supply and demand, instead of on a single exchange. Prices may also be influenced by movements in associated markets, whether this is related instruments, commodities or exchange traded markets.
What is Traded in the Over-the-Counter Market?
The Over-the-Counter (OTC) market is a diverse and versatile marketplace, with a wide range of products available to trade. Some of the most commonly traded products include bonds, derivatives, structured products, and currencies. These products can typically be traded in large volumes, with individual transactions ranging from hundreds of thousands of dollars to millions of dollars in size.
Bonds are securities with long-term maturities and fixed coupon payments, which are traded OTC. Derivatives are financial instruments that derive their value from an underlying asset, such as stocks, commodities, foreign exchange or interest rates. Structured products are financial instruments that are created from a combination of derivatives and can include vanilla options, forward rate agreements, swaps, and exchange-traded funds.
Finally, currencies are also traded OTC, with the foreign exchange (FOREX) market being the world’s largest and most liquid financial market. In the FOREX market, traders can take advantage of rapid price movements in the currencies to make profits, using margin trading, in which some trades are leveraged.
Who Participates in the Over-the-Counter Market?
The OTC market is attractive to a wide array of institutional and professional investors, including banks, corporations, government entities and asset managers. Others participants include retail traders, brokers, exchanges and market makers.
The OTC market is an attractive option for retail traders due to its large volumes, low cost of trading and its liquidity. They can also access the market through a variety of Internet-based trading platforms and have access to streaming market prices and data.
Conclusion
The Over-the-Counter market is a large, decentralized global marketplace which offers participants the ability to trade a wide range of products including bonds, derivatives, structured products and currencies. Transactions in the OTC market take place without the use of a central exchange or market maker, and the prices are determined by a combination of supply and demand. The market is attractive to a variety of participants including banks, corporations, retail traders, brokers, exchanges and market makers. Overall, the OTC market is a versatile and powerful platform that provides sophisticated traders with a variety of investment opportunities.