What are OTC Markets?
What are OTC (Over the Counter) Markets:
Differences with Regulated Markets, Advantages andDisadvantages for Traders In addition to there beingmany financial assets (stocks, bonds, currencies, indices, crypto, etc.) on which you can trade, thereare also several markets on which you can do so. OTC (Over the counter) markets are also amongthem. The most prominent example of an OTC market is Forex, where currencies from all over theworld are traded. But what is an over-the-countermarket?
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Regulated market and OTC market: differences
To fully understand what over-the-counter markets are and how they work, it is necessary to comparethem with regulated markets, to grasp thedifferences.
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In regulated markets...
All exchanges take place in a physical location. Forexample, the stock exchanges (New York, Milan, London, Tokyo, etc.) or the LMAX Exchange inLondon (where currencies are exchanged) or theChicago Mercantile Exchange (for commodities).These exchanges are MANAGED and REGULATED by a central body. For example, if I want to buyGeneral Electric shares on the NYSE (the New York Stock Exchange), this transaction takes placeaccording to the rules set by the NYSE and eachtrade will be verified and controlled. To be admitted tothese markets, you must have REQUIREMENTS thatare certain and clear for everyone. For example, acompany must have a certain capitalization, it musthave been active for a certain number of years, itmust have certain numbers on its balance sheet, etc. There is also a body that is responsible for carrying out all the necessary checks. In the USA, forexample, there is an SEC, while for the Milan StockExchange there is CONSOB.
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In regulated markets, PRICES are defined andcertain, and are the same for everyone. Apple shares listed on the Nasdaq are worth the same amount toanyone who wants to buy them at any given time. Iftheir listing is 1000, that price is for me, for you, andfor everyone around the world. Finally, since thereare all these rules and all this apparatus of bodies that carry out controls, if ever there is a problem, thetrader is legally very protected. In essence, regulated markets take place within strict schemes and rules, they are highly supervised and those who operate inthem can reasonably feel safe.
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In OTC markets...
There are fewer rules, and as we will see, this hasadvantages and disadvantages. First of all, in theOTC market there is no physical place wherefinancial assets are traded, nor a location where allexchanges are controlled and verified. Essentially, itis an exchange that takes place between privateentities (individuals and companies), without therebeing anyone to make rules and supervise. In Forex, for example, the exchange takes place between theindividual private trader and his broker: does theprivate individual want to exchange euros for dollars? Very well, the broker proposes itself as acounterparty by executing this trade at the price thatthe broker itself sets. Another broker may charge adifferent price on that same exchange.
Unlike regulated markets, therefore, there are noofficial quotations: THE PRICE IS NOT UNIQUEAND DEFINED, but is established by the parties. One broker says EurUsd is worth 1,150 whileanother might say it is worth 1,149. Typically, twoprices appear: a buy price and a sell price.
In OTC markets, there is also no formal procedure foradmitting financial assets to the market. Theoretically, anything can be exchanged, freely.
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Over-the-counter (OTC) market definition
Now that we have seen the characteristics of anOver-the-counter market, we can try to define it. OTC markets are DECENTRALIZED markets, thereforewithout a central physical location, where privatesubjects (people and companies) exchange financialassets freely determining the EXCHANGE PRICE, since there are no official quotations. Suchexchanges are NOT subject to supervisory controls.The most well-known OTC market is forex, which isalso the largest and most liquid market in the world. Currencies are bought and sold through a network oftraders rather than in the financial markets. Forex trading is therefore decentralized, and trades cantherefore take place 24 hours a day, without beingtied to specific opening and closing times.