Over The Counter (OTC) Market – Overview

Over The Counter Market (OTC) is not a centralized system for order matching and execution. It’s basically a network of telephones and computers. The main participants in OTC markets are dealers and brokerage firms. These dealers are also called ‘market makers’ and specialize in trading particular types of securities. They have their own inventory of securities which they deal with. They buy and sell securities of the same company and thus create market. They give two way quotes i.e. bid as well as offer.

Brokerage firms which receive instructions from their clients approach dealers for executing their clients’ orders. Brokerage firms receive bid-offer quotes from more than one dealer and best deal is executed.

Mainly the securities of medium to small size companies which are not listed on the stock exchanges are traded in OTC market. Some securities which are listed on exchanges are also traded.

Broker - Dealer: Broker – Dealer is a firm or a person who acts as a broker as well as a dealer either in the same security or in different securities.

Forex market, Debt market and Forward markets are examples of OTC market.