What is OTC Trading?

What is OTC Trading?

OTC Trading

Traders who are looking to buy a significant quantity of cryptocurrencies know that purchasing coins or tokens on a regular platform comes with several downsides. Slippage may significantly raise the cost of a transaction, and they will also have to worry about getting hacked and fraud that is associated with trading on a traditional exchange. Here, OTC (Over-the-counter) trading comes into the equation. OTC trading is a high-volume trading service that is exclusively offered to specific people or organizations.

Additionally, when the items that are traded are not listed on a traditional exchange, OTC is the best option. As a result, the public does not have immediate access to the quantities and rates involved in over-the-counter deals.

OTC transactions always contain two parties. Traders, on the other hand, do not meet in person. Rather, they connect and trade through over-the-counter-specific networks. OTC trading is an important part of the worldwide financial system since it increases liquidity as well as trade flexibility.

How Does It Work

Choosing a partner for a transaction is the first stage in every over-the-counter deal. This can be accomplished in a group chat, but it’s more frequent with an over-the-counter broker platform.

Negotiating the conditions of the deal is the next phase. If traders are trying to buy Bitcoin, for instance, they might want to provide the following information:

  • The quantity of BTC they want to purchase
  • When do they want the exchange to occur
  • The price they are ready to pay

Following this, the seller will return with an offer for the trade, which is frequently indicated as a percentage over the best price possible on a major exchange.

Surely, the actual bargaining process will differ based on if someone is the buyer or the seller, the intermediary that is being used to make the deal, the transaction’s magnitude, & whether they have any weight.

After a price is set, the buyer provides the seller a bank transfer to pay the total cost, and then the seller provides the buyer with the appropriate quantity of cryptos or tokens. Based on where the parties engaged in the deallocated, Know Your Customer (KYC) may be required to ensure that they meet legal standards.

Trusting OTC Deals

It takes time to use OTC, and it performs better when there is a strong level of trust. The responsibility they carry themselves and the people that use their solutions is one of the characteristics of a reliable OTC. The KYC (Know-Your-Customer) form, in particular, and the depth of info they need from their clients in this documentation. It helps in protecting others in the over-the-counter network if traders can verify their identity, finances, and source of money. A Know-Your-Customer form is an important tool for over-the-counter companies to guarantee that the assets they send and receive are authentic. This verifies both the availability of funds and also the source of those funds.

Over-The-Counter Desks will usually take a position & complete the trade for clients. That is, clients, affirm the amount they want to purchase or sell, and they will complete the transaction right away.  Certain OTC transactions, on the other hand, entail matching customers and sellers. Reliability & execution are tough in these circumstances. The sellers and buyers are frequently thousands of kilometers apart and may face linguistic difficulties.

As a reliability measure, traders always meet the individuals they’re buying and selling to (preferably in person). If the participants are truthful, open, and eager to provide whatever paperwork is required, that’s usually a good indicator that they’ve arrived at the appropriate position.

Pros

  • Suited for higher volume trading, whether by high-net-worth people or institutional investors.
  • Enables traders to eliminate slippage, maybe leading to a lower price.
  • Eliminate the risks of bitcoin exchanges being hacked.
  • Enables the traders to work with a reputable broker.
  • When compared to exchange-based trades, it frequently provides faster resolution of big deals and faster access to their assets.
  • Also a possible alternative for ICOs wishing to transfer their cryptocurrency earnings into fiat cash.

Cons

  • Costs may be greater than on established platforms.
  • Over-the-counter trading, unlike exchange trading, cannot be automated via an API.
  • Exclusively available to wealthy investors, hence unsuitable for smaller traders.
  • If traders use a broker, they must have faith in the broker’s ability to carefully examine the parties prior to trading.
  • For people who wish to constantly trade price changes, doing it directly on a platform can be more advantageous.

SEE ALSO: Forex Trading vs. Commodities

Share this article

Caroline Tetra

Leave a Reply

Your email address will not be published. Required fields are marked *

Next Post

What is a Liquid Market?

Tue Feb 8 , 2022
Securities can be quickly transformed into a liquid market with little price volatility and a minimum loss in value. A liquid market is one with a significant degree of stability and small margins between the asking & selling prices. A liquid market has an elevated trading volume since so many […]
What is a Liquid Market?
Subscribe to Our Newsletter Don't miss the latest news!

Enter to get a chance to win 100$ every week!