What is Over the Counter (OTC) Trading


 Over-the-counter (OTC) refers to the trading of financial instruments directly between two parties without a centralized exchange or intermediary. In OTC markets, participants trade directly with each other, negotiating the terms of the transaction privately. This is in contrast to exchange-traded markets, where transactions occur on a centralized exchange with standardized contracts and a transparent order book.

The OTC market is common in various financial instruments, including stocks, bonds, commodities, and derivatives. In the context of stocks, for example, OTC trading involves the direct trade of stocks between buyers and sellers outside of a formal exchange like the New York Stock Exchange (NYSE) or NASDAQ. OTC trading is often facilitated by market makers or brokers who act as intermediaries in the buying and selling process.

In the case of derivatives, many over-the-counter contracts are customized to meet the specific needs of the parties involved. Examples include OTC options and forward contracts. Unlike standardized options traded on exchanges, OTC options can have unique terms agreed upon by the buyer and seller.

While OTC trading provides flexibility and customization, it also comes with certain risks, including counterparty risk and a lack of transparency compared to exchange-traded markets. Regulatory authorities oversee OTC markets to ensure fair practices and to mitigate potential risks associated with private transactions.

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