Over-the-Counter (OTC) Trading Desk) Deep Dive: Market Mechanisms, Product Types, and Investment Risks Explained

When investors are optimistic about a company but cannot find its traces on mainstream exchanges, OTC trading platforms (over-the-counter markets) become an alternative route. This market features diverse products, flexible trading methods, and high leverage options, but also carries risks such as lax regulation and limited transparency. To profit from the OTC market, investors must thoroughly understand its operational logic.

The Essence and Definition of Over-the-Counter Trading

OTC (Over The Counter) refers to a decentralized trading method as opposed to centralized exchanges (such as stock exchanges). In OTC trading platforms, investors do not trade in a unified trading hall but buy and sell various financial instruments through dispersed channels—banks, brokerages, telephone systems, or electronic platforms—also known as “over-the-counter trading” or “off-exchange trading.”

The biggest difference from centralized markets is: OTC prices are directly negotiated between buyers and sellers, rather than determined by a collective bidding mechanism. This bargaining model results in a highly diverse set of counterparties, which may include banks, securities firms, corporations, or individual investors.

Companies that trade OTC generally fall into two categories: one, small to medium-sized enterprises or startups that do not meet exchange listing requirements; two, companies that are eligible for listing but choose OTC trading voluntarily due to high information disclosure requirements. In recent years, with the proliferation of the internet and the expansion of international financial markets, OTC trading markets have rapidly grown, becoming an important trading channel for global investors.

Investment Products Covered by OTC Trading Platforms

The product scope of OTC markets far exceeds that of centralized exchanges. Major tradable instruments include:

Stocks
Although stocks are the largest OTC investment sector, they include unlisted small and medium-sized enterprises and startups, which are difficult to find on mainstream exchanges.

Bonds
Bonds, with their large issuance scale, diverse types, and low trading frequency, are more suitable for OTC trading.

Derivatives
Options, futures, and spread contracts are also common OTC products.

Foreign Exchange
Currency trading on various digital platforms falls under OTC scope.

Cryptocurrencies
Popular digital assets can be traded in bulk on OTC markets, which is often difficult to achieve in dedicated spot markets.

How OTC Trading Platforms Operate

Taking Taiwan as an example, OTC trading mechanisms are similar to those of listed markets, with differences mainly in company size and listing standards. The entire process includes:

Investor Orders
Investors place buy or sell orders for OTC stocks through brokerages, following the same procedures as purchasing listed stocks.

Order Entry into Matching System
Brokerages upload orders to the OTC Center’s Automated Trading System (ATS), which matches buy and sell orders based on “price priority and time priority.” The technical rules are synchronized with those of listed markets, requiring no additional operations or special features.

Trading Hours and Rules Overview

Matching occurs every 5 seconds during the call auction interval.
Price fluctuation limits are ±10% (same as listed markets).

Trading Rules Features

• Price limit up/down (limit hits)
• Call auction method
• Automatic matching trading
• Fixed trading hours

To list on OTC, companies must comply with information disclosure regulations, including quarterly reports, annual reports, and major news announcements, making OTC stocks more transparent than the Emerging Stock Market. Additionally, OTC stock settlement follows a T+2 system, same as listed stocks, with clearance completed within two working days after transaction.

Overall, OTC trading mainly involves small to medium-sized and growth-oriented companies, with higher volatility but more attractive themes and growth potential. Since liquidity is better than in the Emerging Stock Market and the system is the same as the listing market, general investors face no high barriers to participation. However, due to smaller company size, OTC stocks are more susceptible to news and market sentiment, so investors should be cautious of price fluctuations.

Core Differences Between OTC and On-Exchange Trading

On-exchange (centralized market) and OTC (OTC trading platforms) differ significantly in operation logic, product specifications, and regulatory strength:

Product Specification Layer
On-exchange trading’s standardization makes gold trading similar to bank transactions—each institution follows the same standards; OTC trading is more like pawnshops—each has different conditions, but offers more varieties and flexibility.

Trading Mode Differences
On-exchange trading achieves relative fairness through open call auctions, but profit margins are limited; OTC trading allows buyers and sellers to negotiate prices directly, where information advantage can outweigh capital scale.

Product Types
On-exchange trading’s need for standardization limits product variety; OTC products are diverse, including forex CFDs, cryptocurrencies, unlisted stocks, etc.

Regulation and Platforms
On-exchange markets are government-approved and regulated; OTC trading is often provided by brokerages with varying levels of oversight, and there is a risk of virtual exchange scams.

Transparency Differences
On-exchange markets are required to disclose prices and trading volumes; OTC markets do not have such requirements, creating opportunities for savvy investors to earn excess returns but also increasing the risk of losses for ordinary investors.

Liquidity Comparison
On-exchange markets attract international capital due to strict regulation, resulting in high trading volume and liquidity; OTC markets have lower volume and liquidity, risking difficulty in executing trades at desired prices.

Operational Flexibility
On-exchange markets impose strict risk controls, limiting leverage and short selling; OTC trading has fewer restrictions, offering more operational flexibility.

Advantages of OTC Trading Platforms

More Investment Options
OTC markets allow investors to access derivatives, binary options, spread contracts, forex trading, and more, broadening market choices.

Flexible Trading Methods
Products and trading styles are diverse, enabling customized arrangements aligned with individual investment goals.

High Leverage Flexibility
Traditional markets restrict leverage, but OTC platforms offer multiple leverage options, allowing higher multiples to amplify gains.

Market Security Improvements
Modern OTC platforms are gradually enhancing security mechanisms, adopting multi-layer protections that approach the safety levels of centralized markets. Many legitimate brokers are authorized and regulated by reputable financial institutions, making them more professional and reliable. With sufficient professional knowledge, investors can trade confidently in OTC markets.

Risks Faced by OTC Trading Platforms

Lack of Regulation
OTC markets lack unified rules, transparency, and legal oversight, making them prone to fraudulent brokers. Companies and securities listed on exchanges must follow strict regulations; those that do not meet requirements can only circulate OTC.

Liquidity Shortage
OTC securities have much lower liquidity than centralized exchanges, making it difficult to achieve desired transaction prices.

Market Risks
Similar to stock markets, OTC trading is susceptible to market volatility. Most investors lack access to transparent information, complicating decision-making.

Counterparty Risks
Direct negotiations between buyers and sellers can lead to credit risks; some products are highly volatile with low liquidity; the market also faces risks from illegal entities spreading false information to deceive investors.

Safety Assessment of OTC Trading Platforms

OTC Trading Inherently Carries Risks

The absence of unified market rules means buyers may purchase the same product from multiple sellers at different prices. Investors face counterparty credit risk, price fluctuation risk, and liquidity risk. Market fraudsters may spread false information for scams.

Practices to Reduce Risks

The primary focus is to ensure broker reliability—they should be regulated at multiple levels and possess strong risk management capabilities. Next, choose mature trading products and understand details such as spreads, liquidity, and withdrawal procedures.

Legitimate OTC trading platforms often implement investor protection measures, including risk assessments, KYC procedures, and complaint mechanisms, effectively reducing trading risks.

Development of the OTC Market in Taiwan

Taiwan’s stock market is divided into the “Stock Exchange” and the “OTC Center.” The OTC index (Gretai index) reflects the status of Taiwan’s OTC stock market, serving as a reference for many investors observing small and medium-sized stock trends.

This bifurcation aims to ensure listed companies reach certain scales, but overly strict requirements can hinder development, especially for innovative startups lacking funding. To address this, the government established the OTC Center, lowering listing thresholds—companies only need recommendations from more than two brokerages to enter; if within six months the company shows improvement (such as profit turning positive or financial health improving), it can apply for listing or OTC.

Lowering entry barriers promotes financing opportunities but also attracts less reputable companies. Some unscrupulous brokers recommend high-risk stocks (commonly called pink sheets) for profit. Therefore, investors in OTC markets should carefully select targets and seek reputable brokers.

Summary

As an over-the-counter market, OTC trading platforms offer investment opportunities beyond centralized exchanges. Their advantages include diverse products, flexible trading methods, and high leverage options, attracting investors. However, risks such as lax regulation, low transparency, and limited liquidity should not be ignored. To profit in OTC markets, investors must choose legitimate brokers, conduct in-depth research on trading instruments, and establish comprehensive risk management systems to navigate the opportunities and avoid pitfalls in the OTC environment.