OTC trading, short for over-the-counter trading, denotes a transaction that does not take place on a formal exchange. Also known as off-exchange trading these trades are conducted between two private parties with the help of intermediaries or dealer network.
OTC trading involves additional risks compared to trades executed through formal exchanges. One such risk is the potential lack of price transparency, which increases the possibility of a contract breach during the trade.
In addition, it carries higher counterparty risks as compared to formal exchanges. This trading option may experience low liquidity, particularly when large trading amounts are involved.
Despite these risks, some traders prefer over-the-counter trades because they offer parties the ability to execute large transactions with more flexibility than an exchange can provide. Additionally, it can facilitate the transfer of large amounts of cryptocurrency without significantly affecting market prices.
Moreover, OTC trading is an ideal option when an asset is unavailable on an exchange. In such cases, OTC trading enables traders to access the asset they need, albeit with increased risk, due to the potential lack of regulatory oversight and transparency.
It is important to note that OTC trades typically involve only two parties who may not physically meet. Instead, these traders utilize OTC-specific networks to facilitate transactions.