What Is Over-the-Counter (OTC)?

Over-the-counter trading, or OTC trading, refers to a trade not made on a formal exchange.

Instead, most OTC trades will be between two parties and are often handled via a dealer network.

OTC trading is less regulated than exchange-based trades, which creates a range of opportunities and some risks that you need to be aware of.

When you trade OTC with a trading provider, you’ll usually see two prices listed: a single buy price and a single sell price.

This differs from on-exchange trading, where you will see multiple buy and sell prices from lots of different parties.

Types of OTC Securities

The equities that trade via OTC are not only small companies. Some well-known large companies are listed on the OTC markets. For instance, the OTCQX sells foreign companies such as Nestle SA, Bayer A.G., Allianz SE, BASF SE, Roche Holding Ag, and Danone SA.

American depository receipts (ADRs), which represent shares in a stock that trade on foreign exchange, are often traded OTC. Shares trade in this manner because the underlying company does not wish to or cannot meet the stringent exchange requirements. Also, the $500,000 cost to list on the NYSE—up to $75,000 on Nasdaq—creates a barrier for many companies.

Instruments such as bonds do not trade on a formal exchange as banks issue these debt instruments and market them through broker-dealer networks. These are also considered OTC securities. Banks save the cost of the exchange listing fees by matching buys and sells from clients internally or from another brokerage firm. Other financial instruments, such as derivatives, also trade through the dealer network.