OTC (over the counter) market and exchange are the terms that are used in the secondary market where issued securities and financial instruments are traded. OTC is the market that is operated through a dealer and is largely disorganized whereas exchange refers to an organized and established trade system where stocks are traded with defined rules and regulations.
Exchange is the intricate network where there is constant surveillance on the action of the participant so that there is no obligation of rules by the participants whereas OTC is a decentralized market that happens through a dealer therefore there are no rigid rules and obligations.
OTC vs Exchange
The main difference between OTC and Exchange is that over the counter refers to a process of how securities are traded for companies without following any formal obligations whereas Exchange is the marketplace for the trading of commodities, derivates with a centralized method to ensure fair and efficient trading.
The OTC trading happens through the involvement of the mediator know as the dealer whereas exchange is a formal network where trading follows varied rules and norms.
Comparison Table Between OTC and Exchange (in Tabular Form)
| Parameters of Comparison | OTC | Exchange |
|---|---|---|
| Definition | OTC or over the counter is the method of trading for the companies that are not listed formally. | Exchange is the method of trading commodities and derivatives for the well-established companies in an organized manner. |
| Operated by | Securities that are traded over the counter are traded through the dealer. | The exchange is the centralized system of trading with a well-organized network of people to ensure fair trading. |
| Formality status | OTC is the decentralized and informal setting for trading which is usually used by small companies and businessmen. | Exchange is an absolute formal setting of trading done by well-established companies to keep constant supervision on the action. |
| Work hours | It can be operated at any time because it is done through the dealer. | This works according to the exchange timings and not the entire day because it is the intricate network. |
| Defined Location | For trading through OTC one can make use of phones and laptops and can connect from anyplace. | Exchange is the formal setting that has a physical location to be operated from. |
What is OTC?
OTC refers to over the counter trading method which is used by small businessmen and companies. It is also known as an off-exchange because the trading happens directly between the two parties. This kind of trading happens without any supervision and is not publicly disclosed.
OTC market is decentralized for the unlisted companies and can be operated from anywhere such as emails, phones, telephone lines, etc there do not need any specific physical location to operate. There is no formal exchange in this market.
There are some advantages and limitations to this method of trading. Some of the advantages are listed as follows:
- It is a low-cost trading method where investors can earn significant returns.
- Due to fewer obligations many companies at a time can be listed on the trade list.
- OTC provides access to securities that are otherwise not available on a formal exchange.
Some of the limitations of OTC are mentioned as follows:
- It has less trade liquidity and transparency which can often create issues for the investors.
- Fewer regulations and centralized structure make it prone to fraud and outdated information.
- OTC traders tend to take volatile actions on the release of economic data.
What is Exchange?
Exchange is the marketplace where commodities, derivatives and financial instruments are traded. It is done formally to ensure liquidity and fair exchange of commodities among the traders.
Exchange is a centralized method of trading for well-established companies to raise their capital. An exchange may be a physical location where traders meet to conduct business or can be called an electronic platform.
Some of the examples of exchanges can be the New York Stock Exchange and the Bombay Stock Exchange. They operate on a large scale and work with several rules and regulations.
Some of the advantages of Exchange can be:
- It is a formalized structure therefore it maintains transparency and liquidity of the investors and trading system.
- A stock exchange is used to raise the capital of the companies that seek to grow and expand their operations.
Main Differences Between OTC and Exchange
- OTC or over the counter trade system is the method of trading for the companies that are not listed with the standard exchange whereas Exchange is the formalized method of trading where the well-established companies trade to expand their functions.
- OTC is bilateral in its functions which means that the trading happens between the two parties through a dealer whereas Exchange is the intricate network where trade happens through the involvement of the number of traders.
- Another difference that differentiates the two is the physical presence of location. OTC can be operated from various sources such as telephones, emails, computers, etc whereas Exchange has a physical location to operate its trading.
- The exchange follows rigid rules and norms, thus provides liquidity and transparency whereas OTC is the trade that happens between two parties and doesn’t ensure any fair trade operations.
- In OTC the trade can be performed at any time in a day whereas Exchange functions at specified trading hours only.
Conclusion
OTC (over the counter) and Exchange are different methods of trading in a marketplace. When the trade happens between the two parties through a dealer then it is known as over the counter trading whereas when it happens between multiple traders in a transparent form then it happens through an exchange.
Exchange is the formalized and centralized method of conducting trade whereas OTC is a decentralized and informal method of performing the trade. There are no rigid rules and obligations when the trade happens through OTC while Exchange involves providing information publicly and fairly.
Exchange is the trading method for the well-established companies to increase their capital whereas OTC is used by small businessmen and companies.
References
- https://www.craig.csufresno.edu/ijb/Volumes/Volume%2013/V131-2.pdf
- https://www.nber.org/papers/w6179.pdf