Why do investors choose over-the-counter trading? The truth and opportunities of the OTC market

Have you ever encountered a situation where you wanted to invest in a certain company but couldn’t find it on major exchanges? That’s when OTC over-the-counter trading comes into play. Rather than saying OTC is a market, it’s more like another door into the investment world—a door leading to broader assets and more flexible trading.

What exactly is OTC over-the-counter trading?

OTC (Over The Counter) refers to over-the-counter trading, which means investors do not trade on centralized exchanges but directly buy and sell various assets through dispersed channels such as banks, brokerages, phone, electronic systems, etc. In simple terms, it is trading that does not occur on formal exchanges.

The core feature of OTC trading is that prices are negotiated directly between trading parties, rather than generated through a unified bidding system like in centralized markets. The counterparties are highly diverse, including banks, securities firms, corporations, or individual investors.

Why does OTC trading exist? Because many companies do not qualify to be listed on formal exchanges, or even if they do, they choose not to list—possibly to avoid the competitive pressure from excessive disclosure. With the development of the internet, OTC markets have rapidly expanded and become a popular choice for many investors.

What types of products are traded in OTC markets?

The variety of OTC products is far richer than you might imagine:

Stocks — Besides unlisted small and medium enterprises and startups, OTC also trades stocks of companies that meet listing requirements but choose not to list.

Bonds — OTC is more suitable than on-exchange for trading bonds, as bonds are issued in large quantities, with diverse types, but low trading frequency.

Derivatives — Contracts such as options, futures, CFDs, and other forms are all applicable to OTC trading.

Foreign Exchange — Currency trading on various platforms is essentially OTC over-the-counter trading.

Crypto — Mainstream cryptocurrencies are tradable in OTC markets, and OTC allows for one-time large purchases of cryptocurrencies.

How does OTC trading work? Taiwan OTC market mechanism explained

Taking Taiwan as an example, the OTC market operates with a relatively standardized process:

Investors place orders through brokerages → Orders are uploaded to the OTC Clearing Center’s Automated Trading System (ATS) → ATS matches trades based on “price priority, time priority”

OTC trading rules include:

• Call auction every 5 seconds
• Price fluctuation limit ±10% (same as listed markets)
• T+2 settlement system (settlement completed two business days after trade)
• Complete mechanisms including price limits, call auctions, and matched trading

Taiwan’s OTC market mainly features small to medium-sized, growth-oriented companies. It tends to be more volatile, but because of smaller enterprise scale, it is more susceptible to news and market sentiment, so investment risks should be carefully considered.

On-exchange trading vs OTC trading: Seven key differences

What does product standardization mean? — On-exchange trading is like exchanging currency at a bank, where standards are uniform; OTC trading is like pawning, where each transaction has its own unique features.

Difference in trading modes — On-exchange trading is transparent and open but offers limited profit margins; OTC trading is less transparent but can offer greater profit opportunities through informational advantages.

Flexibility in trading methods — On-exchange trading has strict risk controls, leverage, and short-selling restrictions; OTC trading has fewer restrictions, allowing more flexible investments.

The real advantages of OTC over-the-counter trading

✓ Wide investment options — Access to derivatives, CFDs, forex trading, and more, offering a broad market choice.

✓ Greater flexibility — Product specifications and trading methods can be tailored to individual goals, not limited by standardization.

✓ Larger leverage space — Compared to traditional markets with low leverage limits, OTC offers more leverage options, amplifying potential gains.

✓ Market is increasingly mature — Modern OTC markets have optimized security mechanisms, with regulated brokers under multiple layers of oversight, narrowing the safety gap with centralized markets.

Risks of OTC over-the-counter trading that cannot be ignored

❌ Regulatory gaps — OTC markets lack unified regulations and transparency requirements, with relatively loose oversight, making fraud by brokers easier.

❌ Liquidity risk — OTC securities tend to have lower liquidity than formal exchanges, possibly making it difficult to execute trades at desired prices.

❌ Market volatility risk — OTC investors find it harder to access transparent information, making market fluctuations more difficult to predict.

❌ Counterparty risk — Direct trading between buyer and seller exposes both to the credit risk of the counterparty.

Is OTC trading safe? How to protect yourself

OTC trading is not inherently unsafe, but risks do exist. The key is choosing the right trading channels.

Investors should ensure that their chosen brokers:

• Are under multiple levels of government regulation
• Have strong risk management capabilities
• Offer investor protection measures (risk assessment, KYC, complaint mechanisms)

At the same time, carefully select trading products, opting for mature markets like forex, and understand details such as spreads, liquidity, and withdrawal rules.

Investment decision tips for OTC trading

The reason OTC trading attracts investors is that it offers flexibility and diversity that the on-exchange market cannot provide. But this flexibility also comes with higher risks. To profit in OTC markets, investors need to not only choose the right targets but also find reputable, regulated brokers and select suitable trading products based on their knowledge level.

Whether OTC or centralized exchange trading, risk management always comes first. Understanding the characteristics of OTC markets enables more informed investment decisions.