Familiarity with the OTC market / What are the functions of OTC for traders and companies?

According to Tejarat News, the over-the-counter market is a decentralized market where market participants trade stocks, currencies, commodities, or other instruments. These transactions are done directly between the two parties without an exchange, institution or central broker.

There are three types of over-the-counter markets in the world, which include traditional trading market, electronic trading market and optimized trading market.

In the traditional trading market, traders indicate their prices over the phone or on websites. Such transactions are bilateral; Because both sides of the transaction are informed of the price given at a certain point of time by phone.

The electronic trading market also has relatively lower standards and lacks predetermined contracts and transparent derivative transactions.

The optimal trading market is also a combination of two traditional and electronic markets, and traders trade electronically. Traders inform the market of their buying and selling prices, and the trader bears half of the credit risk (negative price fluctuations) in the market.

There are two main OTC networks, the OTC Markets Group and the Over-the-Counter Bulletin Board (OTCBB), which you, as a trader or investor, will have access to one or both of these markets, depending on the type of broker you use.

The OTC market is often dedicated to the trading of assets that, for various reasons, are not traded on an official exchange. For example, in the stock market, companies that are interested in being admitted to the stock market but do not have the necessary conditions to enter this market, use the OTC market to conduct transactions. For this reason, in the stock market, this market is also called the over-the-counter market.

Securities and transactions such as CMO and CDO, which are traded and sold only in over-the-counter markets, do not have a reliable price due to the complete uncertainty of the inventory and due to the absence of buyers. This causes the number of dealers to increase, which is caused by the performance of the market itself. This issue aggravates the liquidity problem and increases global credit crises.

One of the most important measures that can be taken to solve this problem and get rid of the crisis is the use of clearing rooms for the purpose of processing after transactions and trade in over-the-counter markets.

The advantage of the over-the-counter market

• Financial market development and economic growth
• Trading with lower costs and higher profits
• Lack of strict regulations compared to the stock market
• Flexible working hours

Disadvantages of the OTC market

• Due to the volume of transactions, it can have severe price fluctuations
• Systematic risk due to low supervision
• Lack of transparency in price and fees
• Limited and sometimes small liquidity