OTC Market Analysis: Overview of Trading Mechanisms and Characteristics
04-03 15:36uSMART

What is Over-the-Counter (OTC) Trading?

Over-the-ounter (OTC) trading refers to trading activities conducted outside centralized exchange venues. In this type of trading, buyers and sellers can directly engage in transactions via phone, internet, or face-to-face interactions without the involvement of exchanges or other intermediary institutions. This trading method is typically applicable to some non-standardized financial products, offering greater flexibility but also carrying certain risks due to the lack of centralized regulation and transparency.

OTC trading primarily occurs at brokerage firm desks or through online trading platforms. The OTC trading market is also known as the OTC market.


Overview of OTC Market Advantages:

  • Flexibility:OTC markets are often more flexible than exchanges, as trading parties can negotiate transaction terms such as price and quantity without being subject to exchange restrictions.
  • Cost Efficiency: With relatively lower regulatory and operational costs, trading on the OTC market reduces transaction costs by bypassing exchanges.
  • Customization: OTC markets offer more personalized trading services tailored to investors' risk tolerance, investment objectives, and investment horizon, among other factors.
  • Wide Range of Securities Selection and Impact Scope: The OTC trading market provides a platform for companies that do not meet the requirements of regular exchanges, thereby increasing the variety of securities available for investors to choose from.


Overview of OTC Market Risks:

  • Counterparty Credit Risk: There is a risk that counterparties may default, resulting in financial losses for investors.
  • Liquidity Risk: OTC markets lack standardized trading, making it difficult to quickly find suitable trading partners.
  • Legal and Compliance Risk: OTC trading may involve legal disputes and non-compliant activities.
  • Price Transparency Risk: OTC market quotes and transaction information may lack transparency, potentially leading to unfair trading practices.
  • Operational Risk: Complex trading structures and terms require high levels of expertise, with operational mistakes increasing risks.
  • Non-Standardized Products: Many financial products traded in OTC markets are non-standardized, meaning they may lack uniform contract specifications or trading processes.
  • Information Asymmetry: The decentralized nature of OTC markets and the absence of unified trading information and regulatory mechanisms can lead to information asymmetry issues. Investors need to possess higher risk identification capabilities and investment experience when participating in OTC markets.

Investors should carefully assess these risks and adopt appropriate risk management measures.


Overview of Three Types of OTC Markets:

  1. QTCQX Market: Primarily targets companies that have not been able to list on mainstream securities exchanges but possess a certain scale and level of maturity.
  2. QTCQB Market: Mainly serves companies in the early stages of development that may not yet meet the listing standards of higher-tier markets like QTCQX but have achieved a certain level of business scale and growth potential.
  3. Public Market: Comprises companies that do not meet the financial and regulatory requirements stipulated by the U.S. Securities and Exchange Commission (SEC), typically preferring to engage in securities trading and financing activities through OTC markets.

In summary, exchanges and OTC markets each have their own characteristics and advantages. Investors can choose the appropriate trading market based on their needs and risk tolerance levels. Exchanges are suitable for investors seeking standardized, transparent trading with lower risks, while OTC markets provide more flexibility and personalized investment options, requiring investors to possess higher risk identification capabilities and investment experience.


Comparison between Exchanges and OTC Markets



OTC Markets

Trading Venue

Fixed venue and time

No fixed venue and time


Brokers/members institutions

None, direct negotiation

Trading Price

Public bidding

Negotiated by buyer and seller

Variety of Securities

Standardized financial

products like listed stocks,bonds, futures, options

Diverse,including unlisted securities, private equity,

bonds, etc.

Regulation and

Stringent regulation,

Loose regulation, information


disclosure requirements

asymmetry, higher risk


Members institutions/

brokers with certain assets

and conditions

Diverse participants including

investors, corporations,

financial institutions

In summary, exchanges and OTC markets have their own characteristics and advantages. Investors can choose the trading market that suits their needs and risk tolerance levels. Exchanges are suitable for those seeking standardized, transparent, and lower-risk trading, while OTC markets offer more flexibility and personalized investment options, albeit requiring investors to have higher risk identification abilities and investment experience.


Overview of OTC Trading Types:

  • Stocks: OTC trading in stocks typically involves small companies that, due to their size or failure to meet exchange listing requirements, opt to trade in the OTC market.
  • Bonds: Bonds are also a significant component of OTC trading. These bonds may not be listed on exchanges but are traded through channels such as banks and brokerage firms.
  • Derivatives: Derivatives play a crucial role in OTC securities trading. These derivatives can include options, forwards, futures, etc., and are traded based on the value of underlying assets like stocks. By buying or selling derivatives, investors can further manage risk and achieve asset preservation and appreciation.
  • American Depositary Receipts (ADRs):Representing stocks of foreign companies, ADRs enable investors to buy and sell these foreign stocks in their domestic markets, facilitating international asset allocation.
  • Forex Trading: The foreign exchange market is one of the world's largest financial markets. Traders can engage in currency exchange through OTC markets to manage risks and capitalize on opportunities arising from exchange rate fluctuations.
  • Cryptocurrencies: Cryptocurrencies have gradually become popular investment assets in the OTC market. Digital currencies like Bitcoin and Ethereum, with features such as decentralization, anonymity, and cross-border payments, attract numerous investors. In the OTC market, investors can directly negotiate the buying and selling of cryptocurrencies, participating in the booming investment trend in this emerging field.

The types of securities traded over-the-counter are diverse, including stocks, bonds, derivatives, American Depositary Receipts, foreign exchange, and cryptocurrencies. These trading options provide investors with greater flexibility and personalized investment choices.


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