What Is OTC Trading?



What is OTC?

OTC stands for “over-the-counter.” It refers to extra-exchange trading between clients and market makers. The seller and the buyer conclude a deal directly with each other. For a long while, OTC has been an important part of traditional finance. Since 2018, it is also used in cryptocurrencies.


Why is OTC better than exchanges?

People tend to prefer OTC because of price stability, high speed, security, and confidentiality that are arguably superior to those at an exchange.


How is OTC different from trading at an exchange?

At an exchange, in order to conduct a major transaction one has to carry out a series of minor transactions against the fluctuating price. Liquidity and volatility depend on the number of the required transactions and the spread of prices. Price fluctuations are common to the cryptocurrency market, so they can seriously increase the expenses and inflict losses to the players.

In OTC, customers run just one major transaction, which enhances its efficiency and removes problems mentioned above. The transaction is not recorded in the orderbook and is not available publicly, which boosts up the overall confidentiality.


How the demand for OTC changes over time?

For a long while, only big players known as whales could enjoy OTC in cryptocurrencies. However, as the time passed, OTC services lowered the entry threshold so that people with orders over $100k also could join in. This seems convenient considering the difficulties with depositing and withdrawing fiat from exchange accounts, as well as the continuing change of regulatory frameworks around the world. Once the regulations are solidified, major players will require instruments for risk management and liquidity on the OTC market.


How does regulation impact OTC trading?

As cryptocurrency regulation develops, cryptocurrencies gradually become more suitable as a means of traditional investment. Institutional players require deeper and more reliable liquidity. Most cryptocurrency exchanges fail to meet those liquidity requirements, which spurs the development of the OTC market.


How to choose an OTC provider?

OTC companies provide solutions for liquidity, pricing, and data acquisition. This one-price-one-solution approach and individual work with each customer build up a client-focused environment. It allows the companies to expand their services from depositing to issuing loans and syndicating.

The best OTC providers adapt to the developing market conditions, and offer their clients competitive services and liquidity. When comparing providers, pay attention to their ability to transact on rapidly developing markets with high volatility and low liquidity.

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