What is OTC?

This article provides a comprehensive overview of over-the-counter (OTC) trading, its history and its relevance in the digital asset space.

A Brief Description

Over-the-counter (OTC) trading offers options outside of centralised exchanges and traditional trading hours. They do not have physical locations and are conducted by voice, or electronically between two parties, offering investors discretion and access to liquidity outside the ordinary market.

The advantages for buying stocks outside of a centralised platform are quite straightforward; fast accessibility, fewer bureaucratic obstacles and the ability to trade foreign stocks within the local market hours, and with lower market impact. But those strengths originate from the conventional stock market. When it comes to OTC trading for digital assets, its relevance is far greater.   

Why OTC for Digital Assets 

So what problems does OTC trading solve for digital assets? For starters, there is the issue of limited liquidity on retail crypto exchanges. According to data reported by The Block, the 7 day average daily trade volume on centralized exchanges for total cryptocurrencies is $23.71b (17th Nov). For average crypto exchanges, the volume available per trade is directly related to the liquidity available on each platform. The same applies to tokenised assets linked with physical properties like Pax Gold (PAXG), (each unit being represented by one fine troy ounce). If you want to purchase large amounts of PAXG, then you would typically have to access multiple exchanges to fill your order due to limited liquidity. That is where OTC trading comes in. Although digital assets have many exchanges available, their liquidity is not large enough to hold single trades with substantial transaction volume. This has been the primary impetus for non-exchange OTC firms to enter the market, solving liquidity issues and providing larger investors, businesses and miners opportunities to access more efficient liquidity.

OTC trading connects you directly with the counterparty or single-dealer platform, minimizing transaction risk against slippage and market impact, so often seen with standard exchanges. The warranty in price, combined with less counterparty risk and instantaneous access to funds, provide the investor with a more secure, fast and reliable method of performing larger trades. For digital assets, transactions putting down an order through a trusted OTC-based firm can be the difference between a successful trade and substandard one. OTC trading also provides a level of anonymity not available at centralized venues. Having large orders sitting on exchange order books, and facing counterparty risk through having to pre-margin these exchanges, presents hacking and front-running risks. With OTC trading, the orders are truly anonymous, so clients won’t find themselves revealed as significant investors.

OTC trading in the crypto market has the same foundations as traditional OTC trading outside stock exchanges. But contrary to the latter, its financial relevance to the crypto market is far higher than centralized platforms. Digital Asset OTC trading is growing liquidity, reducing counterparty risk and providing entry points for larger traders, investors and institutions. We believe that this will continue, and eventually aggregate into even larger pools – in a similar maturity curve to the FX market. Our OTC investment platform provides clients with deep liquidity as they move seamlessly from fiat to digital assets, with price-lock and post-trade settlement. Hence, the trades are not only optimal but fully discreet and secure.