Over-the-counter (
OTC) trading is to
tradeTrade is the voluntary exchange of goods, services, or both. Trade is also called commerce or transaction. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious...
financial instrumentsFinancial instruments are cash, evidence of an ownership interest in an entity, or a contractual right to receive, or deliver, cash or another financial instrument.-Categorization:...
such as
stockIn the investment world, a share of stock represents a share of ownership in a corporation ....
s,
bondsIn finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity...
,
commoditiesA commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal,...
or
derivativesA derivative is a financial instrument that is derived from some other asset, index, event, value or condition . Rather than trade or exchange the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset...
directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e.,
exchanges), such as
futures exchangeA futures exchange or derivatives exchange is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.-History...
s or
stock exchangeA stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital...
s.
In the U.S., over-the-counter trading in stock is carried out by market makers that make markets in OTCBB and
Pink SheetsPink Quote, informally known as the Pink Sheets, is an electronic quotation system operated by Pink OTC Markets that displays quotes from broker-dealers for many over-the-counter securities. These securities tend to be inactively traded stocks, including penny stocks and those with a narrow...
securities using inter-dealer quotation services such as Pink Quote (operated by
Pink OTC MarketsPink OTC Markets Inc. is a privately owned company based in New York City that provides a suite of products and services for the U.S. over-the-counter securities market...
) and the
OTC Bulletin BoardThe OTC Bulletin Board or OTCBB is an electronic quotation system in the United States that displays real-time quotes, last-sale prices, and volume information for many over-the-counter equity securities that are not listed on the NASDAQ stock exchange or a national securities exchange...
(OTCBB).
Over-the-counter (
OTC) trading is to
tradeTrade is the voluntary exchange of goods, services, or both. Trade is also called commerce or transaction. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious...
financial instrumentsFinancial instruments are cash, evidence of an ownership interest in an entity, or a contractual right to receive, or deliver, cash or another financial instrument.-Categorization:...
such as
stockIn the investment world, a share of stock represents a share of ownership in a corporation ....
s,
bondsIn finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity...
,
commoditiesA commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is a product that is the same no matter who produces it, such as petroleum, notebook paper, or milk. In other words, copper is copper. The price of copper is universal,...
or
derivativesA derivative is a financial instrument that is derived from some other asset, index, event, value or condition . Rather than trade or exchange the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset...
directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e.,
exchanges), such as
futures exchangeA futures exchange or derivatives exchange is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.-History...
s or
stock exchangeA stock exchange is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital...
s.
OTC-traded stocks
In the U.S., over-the-counter trading in stock is carried out by market makers that make markets in OTCBB and
Pink SheetsPink Quote, informally known as the Pink Sheets, is an electronic quotation system operated by Pink OTC Markets that displays quotes from broker-dealers for many over-the-counter securities. These securities tend to be inactively traded stocks, including penny stocks and those with a narrow...
securities using inter-dealer quotation services such as Pink Quote (operated by
Pink OTC MarketsPink OTC Markets Inc. is a privately owned company based in New York City that provides a suite of products and services for the U.S. over-the-counter securities market...
) and the
OTC Bulletin BoardThe OTC Bulletin Board or OTCBB is an electronic quotation system in the United States that displays real-time quotes, last-sale prices, and volume information for many over-the-counter equity securities that are not listed on the NASDAQ stock exchange or a national securities exchange...
(OTCBB). OTC stocks are not usually listed or traded on any stock exchanges, though exchange listed stocks can be traded OTC on the
third marketThird market in finance, refers to the trading of exchange-listed securities in the over-the-counter market. These trades allow institutional investors to trade blocks of securities directly, rather than through an exchange, providing liquidity and anonymity to buyersThird market trading was...
. Although stocks quoted on the OTCBB must comply with U.S. Securities and Exchange Commission (SEC) reporting requirements, other OTC stocks, such as those stocks categorized as Pink Sheets securities, have no reporting requirements, while those stocks categorized as OTCQX have met alternative disclosure guidelines through Pink OTC Markets.
OTC market statistics
Data provided by Pink Sheets:
- Securities quoted exclusively on Pink Sheets - 5,019
- Securities dually quoted on Pink Sheets and OTCBB - 3,445
- Securities quoted exclusively on OTCBB - 130
Total OTC securities - 5,149
OTC contracts
An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts. It is mostly done via the computer or the telephone. For
derivativesA derivative is a financial instrument that is derived from some other asset, index, event, value or condition . Rather than trade or exchange the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset...
, these agreements are usually governed by an
International Swaps and Derivatives AssociationThe International Swaps and Derivatives Association is a trade organization of participants in the market for over-the-counter derivatives. It is headquartered in New York, and has created a standardized contract to enter into derivatives transactions...
agreement.
This segment of the OTC market is occasionally referred to as the "Fourth Market."
The NYMEX has created a clearing mechanism for a slate of commonly traded OTC energy derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort, the exchange's clearing house, thus eliminating credit and performance risk of the initial OTC transaction counterparts.
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