Deep Dive into OTC Over-the-Counter Trading: From Definitions to Risks, a Must-Read Guide for Investors

Many investors encounter this dilemma—finding a promising company but unable to locate it on mainstream exchanges. At this point, you need to understand a vast trading market: OTC (Over The Counter). It is not centrally regulated by exchanges, offers more flexible trading methods, and a wider variety of products, but the risks should not be underestimated.

What is OTC? Understanding the Core Concept of Over-the-Counter Trading

OTC stands for Over The Counter, which refers to a trading method where investors do not trade on centralized securities exchanges but buy and sell securities and other financial products directly through banks, brokerages, phone, or electronic systems. This market is also known as “over-the-counter trading,” “desk trading,” or “OTC market.”

The biggest difference from on-exchange trading is: OTC prices are negotiated directly between trading parties, not determined by centralized bidding. Counterparties may include banks, securities firms, corporations, or individual investors. This decentralization makes OTC trading highly flexible.

Small to medium-sized companies that do not meet listing requirements, startups, or companies that are eligible for listing but choose OTC to protect trade secrets or avoid excessive disclosure tend to trade in OTC markets. With the development of the internet, more investors are attracted to this market because it offers convenience and accessibility that traditional exchanges cannot easily provide.

What Can Be Traded in the OTC Market? An Overview of Investment Products

OTC trading covers a much broader range of assets than on-exchange trading:

Stocks are the largest OTC investment market. It includes not only small companies not listed on exchanges but also equity in many startups, providing more opportunities for growth-oriented investors.

Bonds hold a special position in OTC trading. Due to large issuance volumes, diverse types, but low trading frequency, OTC markets are more suitable for bond trading than on-exchange markets.

Derivatives such as options, futures, and CFDs are also active in OTC markets, providing investors with risk hedging tools.

Foreign exchange (Forex) is inherently OTC. Currency trading on major platforms occurs over-the-counter.

Cryptocurrencies have become an important part of OTC. Investors can purchase large amounts of cryptocurrencies at once, which is often difficult on dedicated crypto exchanges.

How Does OTC Over-the-Counter Trading Work? From Placing Orders to Execution

Taking Taiwan’s OTC market as an example, the operation process includes the following steps:

Investors first place orders through brokerages, identical to purchasing listed stocks. Then, the orders are uploaded to the OTC Clearing Center’s Automated Trading System (ATS), which matches trades based on the principles of “price priority, time priority.” The entire process follows the same technical rules as listed markets, requiring no additional steps.

OTC trading rules are similar to those of listed markets: price limits (±10%), implementation of call auctions, support for matched trading, and clear trading hours. Call auctions occur every 5 seconds, providing a relatively transparent execution mechanism for investors.

Settlement follows the T+2 system—settlement occurs two business days after the trade. Since OTC-listed companies must comply with disclosure requirements, including quarterly reports, annual reports, and major news announcements, transparency is higher than in the OTC Bulletin Board market.

Core Differences Between OTC and On-Exchange Trading: Seven Dimensions

Product specifications: On-exchange products are standardized, OTC products are non-standardized. Like gold trading—banks offer uniform standards, while pawnshops each have different items—pawnshops provide a richer variety of goods.

Trading modes: On-exchange uses call auctions; OTC uses negotiated transactions. On-exchange trading is open and transparent but offers limited profit margins; OTC has no public restrictions, with transactions negotiated directly between buyer and seller, making information more important than capital.

Main products: On-exchange mainly involves securities and futures; OTC includes forex CFDs, cryptocurrencies, unlisted stocks, and more diverse assets.

Regulatory approach: On-exchange markets are approved and regulated by government authorities; OTC markets are operated by general brokerages with relatively relaxed regulation. Some exchanges are regulated, but there is also a risk of unlicensed operations.

Trading transparency: On-exchange prices and volumes are publicly available; OTC trading information is not necessarily public. This information gap can allow savvy traders to earn excess returns but also exposes less experienced traders to higher risks.

Trading volume and liquidity: On-exchange centralized trading has high volume and liquidity; OTC trading volume is smaller, with lower liquidity. This is because regulatory standards make on-exchange markets more attractive to international capital.

Trading methods: On-exchange trading is relatively uniform, with more restrictions on leverage and short selling; OTC markets are more flexible, offering various trading methods and greater leverage options.

Opportunities and Risks in OTC Over-the-Counter Trading

Advantages:

OTC provides a broader range of investment options, including derivatives, binary options, CFDs, and more, allowing investors to access opportunities outside traditional markets. Its core advantage is flexibility—product specifications and trading methods can be customized to meet investment goals. Compared to traditional markets’ leverage restrictions, OTC allows higher leverage to amplify returns, improving capital efficiency.

As the market matures and regulation improves, professional brokers enhance risk control, making OTC safer. Some legitimate trading platforms offer investor protections such as risk assessments, KYC identity verification, complaint mechanisms, and negative balance protection.

Risk warnings:

Lack of regulation is the primary concern. OTC markets lack unified rules, with relatively lax legal and regulatory oversight, making fraud by unlicensed brokers easier. Listed companies and securities on exchanges must follow strict regulations. Many companies that do not meet these standards can only trade OTC.

Low liquidity can increase trading costs. OTC securities tend to have lower liquidity than centralized exchanges, making it difficult to get favorable prices, especially for large trades.

Market volatility also poses risks. OTC investors often lack the transparent information available on exchanges, making them vulnerable to market swings and false information from malicious actors.

Counterparty credit risk is another key consideration. Some products are highly volatile and illiquid, with sellers possibly offering the same asset at different prices to different buyers.

How to Safely Conduct OTC Over-the-Counter Trading?

To ensure OTC trading safety, investors must first choose reliable and regulated brokers. These brokers should be overseen by multiple regulatory authorities and possess strong risk management capabilities, often holding licenses across jurisdictions.

Next, select mature trading products. Before entering a product, thoroughly understand its spread, liquidity, withdrawal difficulty, and other factors. Deeply understand the characteristics of common products like forex and cryptocurrencies.

Additionally, investors need to perform self-assessment. After risk evaluation and completing KYC verification, they can enter the market. Legitimate platforms offer complaint mechanisms and negative balance protections.

Finally, beware of high-risk targets like “Pink Stocks.” Some speculators impersonate unscrupulous brokers, promoting high-risk stocks to trap investors. It’s important to choose reputable brokers and carefully select investment targets.

Summary: OTC Market Is Not a Lawless Zone

While OTC over-the-counter trading does carry risks, it does not mean it is inherently unsafe. Compared to centralized on-exchange trading, OTC involves higher risks, but by choosing regulated brokers, selecting quality products, and conducting proper risk assessments, investors can still profit from this market.

The key is understanding the nature of OTC: it aligns more closely with the fundamental supply and demand laws of economics. It is less constrained by the many regulations of on-exchange markets, offering more opportunities but also demanding higher risk awareness and market understanding. For investors who deeply understand the market and employ correct strategies, OTC over-the-counter trading can indeed provide opportunities for excess returns.