Unveiling what OTC is: From over-the-counter trading to crypto, essential market truths investors must know

Why Do Investors Need to Understand OTC Over-the-Counter Trading?

When you discover a promising company that isn’t available on major exchanges, or if you want to purchase a large amount of cryptocurrency in one go, OTC (over-the-counter) trading becomes your option. Compared to the standardized restrictions of traditional exchanges, what is OTC? Simply put, it is a channel for investors to bypass centralized markets and conduct trades through more flexible methods.

The appeal of OTC trading lies in its diversity and flexibility. Whether it’s stocks of emerging private companies, complex financial derivatives, or 24-hour crypto buying and selling, OTC markets can meet these needs. However, behind this flexibility lie significant risks that should not be overlooked.

What Is OTC? An Explanation of Core Concepts

OTC stands for Over The Counter, referring to trading that occurs outside of centralized securities exchanges, where investors buy and sell various assets directly through banks, brokerages, phone, or electronic systems. This market is also called “over-the-counter trading” or “OTC market.”

Unlike on-exchange trading, which is centralized and price-competitive, OTC prices are negotiated directly between buyers and sellers. Market participants are highly diverse—banks, securities firms, corporations, and even individual investors. This decentralized structure gives OTC markets their unique characteristics.

Many small and medium-sized enterprises and startups that do not meet listing standards, or companies that choose not to disclose excessive information for business reasons, opt for OTC trading. With the development of the internet and the expansion of international financial markets, OTC market size has rapidly grown, becoming an important trading channel for global investors.

What Can Be Traded in the OTC Market?

What is OTC? Its inclusiveness far exceeds that of traditional exchanges. Besides stocks and bonds, OTC trading also covers:

Unlisted Stocks: Small companies and startups that do not meet listing criteria are the main OTC trading products, often with high growth potential.

Cryptocurrencies: Major cryptocurrencies can be traded OTC, allowing large-scale digital asset purchases that are difficult to achieve on dedicated crypto exchanges.

Bonds: Due to the large issuance volume, variety, and infrequent trading, bonds are often more suitable for OTC trading than on exchanges.

Financial Derivatives: Forex, options, futures, and contracts for difference (CFDs) are typical OTC trading products.

Commodities: Gold, oil, and other commodities can also be traded OTC.

How Does the OTC Market in Taiwan Operate?

Taiwan’s stock market is divided into the “Stock Exchange” and the “OTC Securities Exchange,” with the latter’s OTC index (Gretai Index) reflecting the overall condition of small and medium-sized stocks.

The process of trading OTC stocks in Taiwan is highly standardized: investors place orders through brokerages, which enter the orders into the Gretai’s automatic matching system (ATS). The system matches trades based on price priority and time priority. The entire process is identical to trading listed stocks, requiring no special procedures.

OTC Trading Hours and Rules:

Pre-market trading is from 08:30–09:00, regular trading hours are 09:00–13:30, and after-hours pricing is from 13:40–14:30. The system performs a call auction every 5 seconds, with price fluctuation limits of ±10%, the same as listed stocks.

OTC stocks follow a T+2 settlement system, with settlement completed two business days after the trade. Since companies must comply with information disclosure regulations—including quarterly reports, annual reports, and major news announcements—the transparency of OTC markets is higher than that of the Emerging Stock Board.

OTC Over-the-Counter Trading vs. On-Exchange Trading: Key Differences

There are clear differences between the two markets in seven important aspects:

Product Standards: On-exchange trading is standardized with uniform specifications; OTC trading is non-standardized and highly customized. Like gold trading at banks versus pawnshops—banks have uniform standards, pawnshops adapt to local conditions.

Trading Mode: On-exchange uses centralized auction trading, which is transparent but offers limited profit margins; OTC involves direct negotiation between buyer and seller, where information is more critical than capital.

Main Products: On-exchange focuses on standardized securities and futures; OTC products are far more diverse, including forex, cryptocurrencies, unlisted stocks, etc.

Regulation: On-exchange markets are strictly regulated by the government; OTC markets are relatively less regulated, and some trading platforms may not be officially supervised.

Trading Transparency: On-exchange trading prices and volumes are publicly available; OTC markets may not disclose this information, leading to potential information asymmetry.

Trading Volume and Liquidity: On-exchange markets have high trading volume and liquidity; OTC markets may face difficulties in executing trades or unfavorable prices.

Trading Methods and Risk Control: OTC trading offers more methods and fewer restrictions, allowing higher leverage and short selling, but risk management is relatively looser.

Opportunities and Risks of OTC Over-the-Counter Trading

Main Advantages:

OTC trading opens a broader investment universe. You can access derivatives, binary options, CFDs, and other tools that are difficult to find in traditional markets, offering a wide range of choices.

The flexibility in trading methods and product specifications allows for customized trading aligned with your investment goals. Compared to traditional markets, OTC offers more leverage options, enabling you to amplify gains.

Modern OTC markets have gradually optimized security measures, similar to centralized markets. Licensed brokers are regulated by reputable financial institutions, providing a certain level of professional protection.

Main Risks:

The lack of unified regulations and strict oversight is the biggest hidden danger in OTC markets. Many scam brokers operate here, and companies or securities that do not meet exchange standards can only trade OTC, making authenticity hard to verify.

OTC securities generally have much lower liquidity than centralized exchanges, meaning you might not be able to execute trades at desired prices, or could face situations with no buyers.

Market volatility also impacts OTC investments, but investors often lack transparent information support. Buyers and sellers may trade at different prices, introducing credit risk. Some products are highly volatile with minimal liquidity, and malicious actors may use false information to scam.

Is OTC Over-the-Counter Trading Safe? How to Ensure Safety?

What risks does OTC pose? The absence of exchange regulation indeed entails higher risks, but it is not necessarily unsafe. The key lies in how to choose and prevent scams.

The primary principle is to ensure the safety of your broker. Legitimate brokers should be regulated at multiple levels and possess strong risk management capabilities. Choosing government-approved and regulated trading platforms can significantly reduce scam risks.

Second, select mature trading products. Prioritize liquid assets like forex and mainstream cryptocurrencies with transparent spreads, and understand their liquidity and withdrawal mechanisms thoroughly.

Third, utilize platform protection mechanisms. Reputable trading platforms typically offer risk assessments, KYC procedures, complaint handling, and other investor protection measures, which help reduce trading risks.

Additionally, investors should deepen their market knowledge, carefully identify false information, control leverage ratios, and never gamble everything on a single trade. Remember, in OTC trading, knowledge and caution often determine success or failure.