What is Over-the-Counter Trading (OTC)?
What is OTC trading?
OTC trading stands for over-the-counter trading and refers to trading financial assets outside of a regulated exchange. Instead of using a centralized exchange with a public order book, transactions are executed directly between buyers and sellers, often with the help of a broker or a specialized OTC desk. It is fully legal and commonly used for larger amounts.
With OTC trading, orders do not appear in a public order book. Price, volume, and timing remain private between the involved parties. This makes OTC trading especially suitable for large transactions, where discretion and price stability are important.
In short, OTC trading is designed for executing large orders with minimal market impact, increased privacy, and personalized support.
Key Takeaways
- OTC trading (over-the-counter trading) involves trading crypto and other financial assets outside of a public exchange, with price, volume, and timing remaining private between the involved parties.
- It is mainly used for large transactions (usually from €50,000 to €100,000 and up), as these can affect market prices on a regular order book due to slippage and limited liquidity.
- With OTC trading, a fixed price is agreed upon in advance, allowing large orders to be executed without direct price impact, market volatility, or visibility to other traders.
- OTC desks provide access to deep liquidity and personalized support by comparing prices across multiple liquidity sources and actively managing the transaction.
- Although OTC trading may show a higher visible fee, total costs for large volumes are often lower than on an exchange, as slippage and market impact are avoided.
Which products are traded OTC?
The OTC market is broad and has existed for decades. Many financial products are (partly) traded outside of exchanges or brokers:
- Cryptocurrency
Within crypto, OTC trading is mainly used for large transactions. At higher volumes, many brokers and exchanges offer dedicated OTC desks, allowing swaps and trades to take place outside the regular order book. If you plan to execute a large transaction via Finst (€100,000+), you can contact us if needed for personal support.
- Bonds
Many bonds, especially those from smaller issuers or without a standard credit rating, are traded OTC. This also applies to customized bond products.
- Currencies (Forex)
This market is the largest OTC segment worldwide. Currency trading takes place through a global network of banks and financial institutions, allowing trading 24 hours a day.
- Stocks
Primarily shares of companies that do not (yet) meet the listing requirements of major exchanges. Some foreign stocks are also traded OTC via so-called ADRs (American Depositary Receipts).
- Derivatives
Many derivatives, such as forwards, swaps, and certain options, are traded OTC. This allows for customization but also comes with higher counterparty risk.
What is the difference between OTC trading and regular exchange trading?
The main difference lies in where and how trading takes place. Many large crypto exchanges or stock exchanges have their own OTC desks where these trades can be executed. Below, we explain the differences.
Regular exchange or broker trading
On an exchange, all buy and sell orders are placed in a public order book. Anyone can see at what price and in what quantity assets are offered. Prices are formed through visible supply and demand. This ensures transparency but also has a downside: large orders can directly affect market prices.
OTC trading
With OTC trading, the transaction takes place outside of the exchange, usually via a broker or OTC desk. Two parties agree on a price and quantity directly, without the market being immediately aware.
The advantage is that large orders do not cause immediate price movements. This allows larger volumes to be traded without slippage or unfavorable price fluctuations.
Why can large orders affect the price on an exchange?
On a regular exchange, the price of a cryptocurrency is determined by visible supply and demand in the order book. This order book contains all buy and sell orders placed by other participants, sorted by price. The current market price is formed where buyers and sellers meet.
This system provides transparency but also has a major drawback: large orders can directly impact the market price.
How does price discovery work on an exchange?
- Buyers place bids (buy orders) at a certain price
- Sellers place offers (sell orders) at a certain price
- Prices move based on which orders are executed
Because the order book is public, anyone can see how much liquidity is available at each price level. This also means that available liquidity per price level is limited.
What happens with a large buy order?
Below is a simplified explanation of how an order book works and why it can affect price. Suppose the price of Bitcoin is €40,000 and the order book looks like this:
- €40,000 → 0.5 BTC for sale
- €40,100 → 0.7 BTC for sale
- €40,300 → 1 BTC for sale
If you want to buy 2 Bitcoins at once, the order cannot be fully executed at a single price. Instead, the following happens automatically:
- First, you buy 0.5 BTC at €40,000
- Then, 0.7 BTC at €40,100
- The remaining amount is bought at €40,300
Your order effectively consumes multiple layers of the order book. As a result, the average purchase price is higher than the original market price, and the visible price on the exchange moves upward.
This effect is called slippage: the difference between the expected price and the final execution price.
Additional market impact due to visibility
Because the order book is public, other traders and trading algorithms immediately see this movement. This can trigger additional effects:
- Other traders react to the price movement
- Bots automatically adjust their orders
- The price may move further beyond the impact of your order alone
A large order therefore acts as a signal to the market, which can further amplify price impact. You can imagine that when hundreds of millions or even billions are bought or sold in certain cryptocurrencies, this directly affects the price.
Why is this relevant for large transactions?
The larger the order relative to the available liquidity in the order book, the greater the price impact. For small transactions, this effect is usually negligible, but for large volumes, the difference can be significant.
This is exactly why many professional parties choose OTC trading for large orders, where the transaction takes place outside the public order book and does not directly impact the market price.
Who is OTC trading suitable for?
OTC trading is mainly suitable for parties that want to trade large amounts without disrupting the market, such as:
- Institutional investors
- Companies
- High-net-worth individuals
- High-volume crypto traders (whales)
On a regular exchange, a large order could significantly move the price or be only partially filled, resulting in slippage. OTC trading prevents this. In addition, many clients choose OTC trading because of the personalized service. Instead of an anonymous platform, you have direct contact with an account manager who oversees the entire process.
In short, OTC trading is intended for transactions starting at approximately €50,000 to €100,000 (depending on the crypto broker or exchange), where discretion, deep liquidity, fixed pricing, and personal support are key.
The benefits of OTC trading
1. No direct price impact
Because OTC transactions do not appear in a public order book, your order has no direct impact on the market price. You agree on a fixed price in advance for the full volume, avoiding slippage and price changes during execution.
2. Deep liquidity through networks
OTC desks use multiple liquidity sources, such as exchanges, market makers, and external liquidity providers. The broker compares different markets and constructs a competitive price, which can be especially beneficial for large orders.
3. Personalized service
OTC trading is not just about technology, but also about human interaction. You discuss the order personally, receive guidance throughout the process, and can make custom agreements regarding execution and settlement. At Finst, we refer to this as institutional investing.
Drawbacks of OTC crypto trading
Although OTC trading offers many benefits, there are also risks:
1. Counterparty risk
Because the transaction takes place outside of an exchange, there is a risk that the counterparty does not fulfill its obligations. That is why it is important to work only with regulated and reliable OTC desks.
2. Regulation and compliance
OTC trading falls under KYC and AML regulations. Clients must account for identification procedures, risk assessments, and potentially enhanced due diligence (EDD).
3. Fraud and scams
Due to its private nature, OTC trading can be attractive to scammers. Always work with reputable parties and avoid informal deals without clear agreements.
4. Limited price transparency
Because OTC prices are not public, price comparison is more difficult. A professional broker will always provide market insights and a clear explanation of the price.
How does an OTC transaction work in practice?
An OTC transaction typically follows these steps:
- Contact and request
You contact an account manager and indicate how much crypto you want to buy or sell, for example: “I want to buy €100,000 worth of bitcoin” or “I want to sell 1 bitcoin”.
- Price quote (quoting)
The OTC desk requests a price for the desired volume, calculates the fee, and communicates one all-in price. This price is temporarily valid, as markets move in real time.
- Agreement and execution
After your approval, the transaction is executed and the price is locked in. A binding agreement is created.
- Settlement
You receive an invoice with all details (price, quantity, wallet address, bank account). After euros or crypto are received, the counterperformance is delivered, usually within one business day. Unlike an exchange, where an automated system matches orders, OTC trading is fully guided and controlled personally.
OTC trading versus exchange trading (overview)
Is OTC crypto trading legal?
Yes, OTC crypto trading is legal in most countries, as long as it complies with local regulations. Reliable OTC desks apply strict KYC and AML procedures and operate within the legal framework.
Final thoughts
OTC trading is a discreet and efficient way to trade large amounts of crypto without affecting the market. With fixed prices, deep liquidity, and personalized support, it is a suitable solution for institutional investors and high-net-worth individuals.
For those who want to execute large transactions with maximum control, minimal slippage, and professional support, OTC trading is a valuable alternative to regular exchange trading.
