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What does OTC exchange mean? Detailed interpretation of OTC trading platform

Karen Carpenter

Jan 15, 2025 pm 03:29 PM

exchangetrading platform

Over-the-counter (OTC) exchanges are platforms where traders bypass centralized exchanges for direct trading. OTC exchanges offer flexibility, privacy, and low transaction fees, but suffer from counterparty risk, low transparency, and illiquidity. The trading process usually involves buyers and sellers negotiating quotes with market makers, agreeing on price and quantity, and then executing the trade. Although OTC exchanges are not subject to centralized regulation, they are subject to regulations such as anti-money laundering.

What does OTC exchange mean? Detailed interpretation of OTC trading platform

What is an OTC exchange?

An over-the-counter (OTC) exchange is an over-the-counter trading platform that allows buyers and sellers to trade directly, bypassing centralized exchanges. On OTC exchanges, traders can negotiate prices and quantities based on their needs.

Detailed interpretation of OTC trading platform

Advantages:

Flexibility: OTC trading offers greater flexibility as traders can negotiate customized trading terms, including price, quantity and delivery time.
Privacy: Transactions are conducted privately, so transaction information is not disclosed to the public.
Low Trading Fees: OTC exchanges typically charge lower trading fees because trading is done over-the-counter.
Liquidity: Large OTC exchanges have a wide range of counterparties and assets, providing higher liquidity.

Disadvantages:

Risk: OTC trading does not have the supervision and protection of a centralized exchange, so there is greater risk counterparty risk and manipulation risk.
Low transparency: OTC trading information will not be publicly disclosed, which may lead to market manipulation and price opacity.
Lack of Liquidity: Small OTC exchanges may lack liquidity, making trade execution difficult.

How OTC trading platforms operate

OTC trading platforms usually consist of market makers or brokers who provide quotes to buyers and sellers. Traders can contact multiple market makers to get the best quotes.

The transaction process involves the following steps:

Traders submit their trading intentions to the OTC trading platform.
Market makers provide quotations, including price, quantity and delivery conditions.
Trader chooses the best quote.
Both parties reach a consensus and execute the transaction.

Compliance

While OTC transactions are not regulated by centralized exchanges, they are still subject to anti-money laundering and counter-terrorism financing regulations. OTC exchanges must implement measures to prevent illegal activities.

Summary

OTC exchanges provide an OTC trading platform that allows traders to directly negotiate trading terms. While they offer the benefits of flexibility, privacy, and low fees, they also come with risks and less transparency. When using OTC exchanges, traders should exercise caution and evaluate potential risks and rewards before trading.

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