Over the counter trading is a form of trading where securities are traded in an over the counter market through a broker- dealer network. This trading takes place in a non-traditional market without the supervision of a regulator.
Over the counter market is a decentralised place of trading. This trading can involve both equities and debt instruments. Over the counter trading does not need to involve trading of just standardised items and prices are also not always disclosed to the public.
As over the counter trading doesn't need to involve standardised items, the securities which do not meet the requirement to make it to the list in the standard market can be traded in the over the counter market. This helps to make the securities available to the investors which otherwise wouldn’t have been available to them through the standard market.
What is the importance of Over the counter trading?
As over the counter trading is not centralised, it gives the whole trading process a lot more flexibility and the parties involved can make changes to the derivatives based on the expected risk. This also provides a lot of liquidity to the trading market.
As even the non-standardised items can be traded through the over the counter market, it gives the investors exposure to the securities that are not traded in the standard market.
Advantages and disadvantages of over the counter trading
As with any other trading market, the over the counter market also has its share of advantages and disadvantages.
Advantages:
Over the counter trading has much less rules and regulations as compared to the centralised trading. The trading is through a broker and even companies that cannot or choose not to trade in other markets can be involved in the over the counter market.
Over the counter trading allows exposure to securities that are not listed in the standard market.
Disadvantages:
The lack of proper rules and regulations makes the over the counter market much more volatile and more prone to the risks.
Also the lack of information to the public, leads to misinformation and may eventually lead to fraud.
