OTC (Over-the-counter) or off-exchange

DEFINITION of OTC (Over-the-counter) or off-exchange

OTC (Over-the-counter) or off-exchange means that trading is done directly between two parties, without the control of an exchange.

WHAT IT IS IN ESSENCE

It is in contrast with exchange trading because trade is not made on a formal exchange. A stock exchange has the benefit of facilitating liquidity, providing transparency. And maintaining the current market price.

In an OTC trade, the price is not necessarily published in public.

The OTC is a market where financial instruments such as currencies, stocks, and commodities are traded directly between two parties.

OTC trading has no physical location — trading is done electronically.

Agreements on what, how many, for what price and under what conditions, are all made based on mutual consent. 

But are not standardized like financial instruments traded on stock exchanges.

OTCs can also include debt securities and other financial instruments such as derivatives, which do not trade on a formal exchange.  But are usually made to market by investment banks seeking to raise funds for specific issues.

OTCs are mostly traded for smaller companies that do not meet the criteria for a listing on the stock exchanges. They may also be referred to as unlisted stock.

HOW TO USE

OTC trading occurs with commodities, financial instruments (including stocks), and derivatives of such products.

Products traded on the exchange must be well standardized. This means that exchanged deliverables match a narrow range of quantity, quality, and identity. Which is defined by the exchange and identical to all transactions of that product? This is important because of transparency in trading.

The OTC market does not have this limitation.

They may agree on an unusual quantity, for instance. In OTC, market contracts are bilateral which means that the contract is only between two parties.

Each party could have credit risk concerns with respect to the other party. The OTC derivative market is significant in some asset classes: interest rate, foreign exchange, stocks, and commodities.

When trade OTC with a trading provider, there are two prices listed: a single buy price, and a single sale price.

This different from on-exchange trading, where multiple buy and sell prices from lots of different parties are seen.