What is Over the Counter (OTC)?
Over the Counter (OTC) is a term used to describe financial instruments that are traded directly between two parties, without the supervision of an exchange or other intermediary. OTC instruments are not listed on any exchange and are not subject to the same regulations as exchange-traded instruments. OTC instruments are typically used for more complex transactions, such as derivatives, swaps, and other exotic instruments.
History of Over the Counter (OTC)
The term “over the counter” originated in the early 1900s, when brokers and dealers would meet in person to conduct transactions. These transactions were conducted “over the counter” of the exchange, hence the name. Today, OTC transactions are conducted electronically, but the term is still used to describe transactions that are not conducted on an exchange.
OTC instruments are typically used for more complex transactions, such as derivatives, swaps, and other exotic instruments. These instruments are not subject to the same regulations as exchange-traded instruments, and as such, they can be more risky. OTC instruments are also used for transactions that require more flexibility, such as customized contracts or transactions with a large notional value.
Comparison of Exchange-Traded and OTC Instruments
| Exchange-Traded Instruments | OTC Instruments |
|---|---|
| Listed on an exchange | Traded directly between two parties |
| Subject to exchange regulations | Not subject to exchange regulations |
| More liquid | Less liquid |
| Less flexible | More flexible |
Summary
Over the Counter (OTC) is a term used to describe financial instruments that are traded directly between two parties, without the supervision of an exchange or other intermediary. OTC instruments are typically used for more complex transactions, such as derivatives, swaps, and other exotic instruments. These instruments are not subject to the same regulations as exchange-traded instruments, and as such, they can be more risky. For more information about OTC instruments, visit the websites of the major exchanges, such as the New York Stock Exchange, Nasdaq, and the London Stock Exchange.
See Also
- Derivatives
- Swaps
- Exotic Instruments
- Exchange Regulations
- Liquidity
- Flexibility
- Notional Value
- New York Stock Exchange
- Nasdaq
- London Stock Exchange
