OTC (Over-the-Counter) trading is a non-regulated manner in which financial instruments are traded directly between two parties. The markets, for any kind of asset, are a combination of non-regulated and regulated exchange.
The listing on a non-regulated market (OTC) still takes place according to the demand/supply rule. Due to the non-standardisation feature of this type of market, the return is not always strictly correlated with the official exchange. OTC should not be confused with private exchanges between banks and their clients (this market is known as Organised Exchange Systems).
One of the most common assets traded on the OTC market is the forward contract, which is non-standardised with respect to the futures contract. The main difference between the two is that futures are standardised on the basis of the market on which they take place (for example, see margin requirements), while forwards are non-standard contracts that are not traded on organised exchanges. One of the most famous OTC markets is the NASDAQ. Set up as an OTC market (named NASD), most trading on the NASDAQ is fully regulated (see Stock Market). OTC markets are utilised both for high volume trading between institutional investors and for very low volume transactions.
Trading is carried out in an informal manner, through bilateral conversations between the agents (demand and supply) either by phone, fax or other form of data transmission.
With respect to official Exchanges such as the MOT (Fixed Income: Treasury bond/Bill - private bond), the OTC market does not require any formal admission for individuals (there are no primary dealers or specialists), no rules on market mechanisms (such as market margin or maintenance margin), no trading book where bids are listed and ordered by price and volume. Moreover, no information is required from the issuer to trade assets.

Bibliography

CICIARETTI R. and TRENTA  U., 2006, La Borsa Europea. Una Visione d’Insieme, in Rapporto sul Sistema Finanziario Italiano 2006, ARACNE, Roma

Editor: Rocco CICIRETTI

© 2009 ASSONEBB