

On this particular exchange, the market makers sell three types of apples: Gala apples, Granny Smith apples, and Fuji apples. In the apple exchange, you have a bunch of apple traders that will sell you certain types of apples depending on what the exchange allows them to sell. You can either opt to go directly through the Apple exchange or you can go to the over-the-counter market to buy apples. How you can buy an apple on the OTC market and how you can buy apples on an exchange?įor example, if you want to buy apples, you have two options. We’re going to look through an example to better understand the difference between the OTC market and exchange trading.įor this purpose, we’re going to use an apple instead of stocks. Traders have always been curious about what’s the difference between the over-the-counter market and the regular exchange.

Difference between OTC Trading and Exchange Trading The average daily foreign exchange trading volume is $5.1 trillion, which makes it by far the largest market in the world. The biggest OTC market in the world is the Forex market.

Nowadays OTC trading is mostly done electronically. The OTC stocks are also known as pink sheets because back in the day these stock quotes used to be published on pink paper. Usually, companies that are too new or too small to be listed on a major stock exchange are listed in the over-the-counter market. They don't require any exchange membership and they don’t need to meet the exchange standards. The over-the-counter market is a decentralized market and in contrast to trading on NYSE or CME, over-the-counter trading is structured in groups of dealers that act as market makers for their own customers.

Unlike stock exchange trading where securities are traded on physical public exchanges, OTC trading has no physical location. The OTC over-the-counter, or off-exchange, is a market where financial instruments (stocks, commodities, currencies, or cryptocurrencies) are traded directly between two counter-parties. This comes with a lot of advantages. Let’s look at the over-the-counter meaning and compare it to a regular exchange. If you’re a big player and you want to hide your trading activities from the general public, you can do so by trading anonymously on the over-the-counter market. Over-the-counter trading allows hedge fund managers to carry out direct trades with each other without leaving footprints in the market. This is a huge market, which is the reason why smart money and big players choose OTC over-the-counter instruments. We believe it’s important to learn how OTC derivatives are used by smart money.Īccording to BIS the OTC derivatives market size at the end of 2018 was $544 trillion. The OTC over-the-counter market is where the credit default swaps are traded, which is assumed to have been the catalysts for the 2007 stock market crash.
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Make sure you hit the subscribe button, so you get your Free Trading Strategy every week directly into your email. If this is your first time on our website, our team at Trading Strategy Guides welcomes you. Because of this, we’re going to give you a step-by-step process to follow before you start engaging in the over-the-counter market. Over-the-counter trading often takes the blame for the 2007 financial meltdown and the increasing systemic risk.
