What is OTC (Over The Counter)? How does OTC work?

What is OTC?

OTC is short for Over-The-Counter. OTC (Over-The-Counter) refers to the process of trading assets directly between 2 parties without going through an intermediary, like an exchange, for example.

OTC is especially useful for whales who want to create or fill trades of high value. Such trades on the conventional market would cause price slippage, price fluctuations, or simply cannot be completed due to low liquidity or asset unavailability.

How does OTC work?

Opposite to trades conducted on centralized exchanges, OTC trades are listed on a separate market called OTC Market or OTC Marketplace.

On centralized exchanges, trades gather at order books where there are various makers (sellers) and takers (buyers) putting up orders constantly. As a result, traders are almost always guaranteed to fill their orders as long as there is enough liquidity on the exchange. Exchanges are responsible for creating and maintaining those order books.

On the other hand, in OTC markets, there are no exchanges (third parties) as well as order books. Trades are carried out simply when there is a buyer and a seller who both agree on (a) specific condition(s). This is considered the original way to trade assets, which is based on negotiations.

Advantages of OTC

• Does not cause price slippage or price fluctuations to the asset.
• Can conduct trades in a private manner.
• May impose 0 fees as there are no third parties.
• Can trade assets of any kind.

Disadvantages of OTC

• It is difficult to fill OTC orders due to low liquidity.
• Have to negotiate/set up agreements ⇒ may take time to pull off.
• Vulnerable to fraudulent actions.
• Large price spreads.

How to trade OTC

There are numerous ways to trade OTC orders, depending on the marketplace you are using. However, the framework for trading OTC is:

Step 1: Find an OTC market. For cryptocurrency, most exchanges have an OTC market section. You can also find an OTC market through private groups or people.

Step 2: Find or create an order as you wish. This may include a lot of the terms like the type of asset, affordable price, buy amount, etc.

Step 3: Complete the trade. This is done if you find a buyer (as a seller) or fill an order yourself (as a buyer). Before completing the trade, you and the opposite party have to agree on all the terms and conditions.

Where can we trade OTC?

As mentioned above, we can trade OTC on most cryptocurrency centralized exchanges like Binance, Huobi, etc.

At the same time, you can trade OTC directly with the seller/buyer through contact or communication. This can be done via group chats or channels. However, such OTC markets may pose fraudulent threats. Therefore, you should be careful before conducting OTC trades of any kind.

Why do we use OTC?

We as crypto traders want to use OTC for its benefits: no market impact, privacy, 0 fees, and asset availability. In most cases, if you are a crypto whale investor, you would prefer OTC over conventional trades.

There are numerous reasons behind it. First of all, your trades would not leave an impact on the market. You would not want to sell cryptocurrency tokens worth $1M just to find out that you receive 10% less than what you expect.

Second, as a whale, you would not want to let your trades be exposed and tracked by others. This is when privacy is appreciated.

Third, you may benefit from 0 trading fees as your trades are not processed by third parties. For small orders, a 0.1% fee may not be problematic. However, for large order sizes like $1M+, such fees are worth considering.

Finally, you would want to trade assets on OTC marketplaces if such assets are not available on other markets. For an asset to be listed and traded on a major exchange, it would take a lot of time, procedures as well as a large amount of money. Native tokens of new and small projects would not be available on those centralized exchanges; some cryptocurrencies can only be traded on OTC markets.

FAQs about OTC

Who runs OTC?

Theoretically, no one runs OTC - OTC is operated directly by two parties which are the buyer and the seller. However, there are a lot of OTC marketplaces provided by third parties to reduce fraudulent risks. Nevertheless, such third parties take no involvement in the trade.

Is crypto OTC safe?

OTC, whether crypto or other types, is not as safe as other ways of trading. This is due to the fact that OTC trades are negotiated by only two parties and there are no intermediaries to supervise and ensure the safety of the process. Either of the two parties may go against the agreements at any time.

To deal with this, there are various third parties that provide OTC services to protect their clients (crypto centralized exchanges, for example). These OTC markets are safer as intermediaries can take part in the finalizing process, ensuring both parties have followed the rules, hence improving the trade’s safety.

Does OTC trading affect the price?

No, OTC trades do not affect the market price as they are not conducted on the order book.