OTC trading occurs directly between two parties rather than on a formal exchange. It’s commonly used for assets like Forex, Derivatives, and certain Cryptocurrencies. The flexibility of OTC allows for customized contract terms and larger trade sizes, appealing to institutional traders or high-net-worth clients. However, it also brings elevated counterparty risk and reduced transparency compared to regulated exchanges. Without standardized pricing, participants must rely on reputation and due diligence of the counterpart. OTC markets enable tailored solutions but demand strict risk management and trust. Traders using OTC must verify counterparties and consider legal and settlement frameworks.
Example:
Shares of a small company trade directly between brokers rather than on a major exchange.
