OTC(Over-the-Counter)

What is Over-the-Counter (OTC) Trading?

Over-the-counter (OTC) trading refers to transactions where both parties determine the price and volume of the trade independently.

In forex trading (Forex Margin Trading/Leveraged Trading), this means investors trade directly with forex brokers. Currently, most forex trading is conducted over the counter.

This article will explain the meaning of OTC trading in detail and discuss its differences from exchange trading and sub-brokerage trading.

General Definition of OTC Trading

OTC trading refers to transactions where both parties determine the price and volume independently.

In English, it is also referred to as OTC (Over The Counter).

OTC trading allows both parties to freely decide prices and volumes, avoiding risks such as price volatility, which provides certain advantages.

OTC Trading in Forex

In leveraged forex trading, OTC trading means transactions occur directly between the forex broker and the client.

For example, if an investor buys US dollars, the forex broker acts as the seller.

Different forex brokers have varying trading prices, spreads, and financing costs, as these transactions are conducted over the counter.

This also applies to non-leveraged forex transactions.

For instance, consider currency exchanges for overseas travel.

Exchange rates differ between city banks and currency exchange counters at airports.

Typically, exchange rates at airport counters are less favorable (allowing them to earn more profit).

Why do exchange rates differ?

This is because banks and currency exchange counters conduct direct OTC transactions with customers.

Differences Between OTC and Other Trading Methods

Below are the differences between OTC trading and other trading methods.

Differences Between OTC and Exchange Trading

Exchange trading refers to transactions conducted on stock exchanges (e.g., TWSE - Taiwan Stock Exchange / HKEX - Hong Kong Stock Exchange / JPX - Japan Exchange Group, etc.).

In OTC trading, transactions are conducted directly between the two parties, whereas in exchange trading, investors place orders through brokerage firms to trade on the stock exchange.

Stock trading primarily adopts exchange trading but may also include OTC trading.

Differences Between OTC and Sub-Brokerage Trading

Sub-brokerage trading refers to a transaction method where a domestic securities firm acts as an intermediary for investors' orders.

In sub-brokerage trading, the investor’s orders are passed through a domestic securities firm to a local agent, who then places the orders in the foreign market.

After the transaction is completed, the securities firm charges the investor a service fee.

FAQs About OTC Trading

What is the Opposite of OTC Trading?

The opposite of OTC trading is "exchange trading."

Exchange trading refers to buying and selling transactions conducted on stock exchanges.

Stock trading primarily adopts exchange trading.

Is Forex Margin Trading Considered OTC Trading?

Most forex margin trading falls under OTC trading.

Summary: What is OTC Trading? | Differences from Exchange and Sub-Brokerage Trading

Term	Summary
OTC Trading	Transactions conducted directly between investors and brokers.
Exchange Trading	Transactions conducted on stock exchanges.
Sub-Brokerage	Investors place orders through domestic securities firms, which then execute the orders overseas.