🌑What is OTC Trading?

What is OTC trading?

OTC means 'Over the Counter' trading. In Traditional Finance, OTC trades are done privately through a broker dealer network instead of centralized exchanges like the NYSE. Usually, orders would be made from institutional parties and pushed towards the broker which would then publish this order out to their counterparties and find a match. Once a match is found the trade would happen 'over the counter'.

The flow then would be as follows:

Trader --> Broker --> Network --> Trade --> Settle

Understanding Crypto OTC Trading in seconds

Crypto OTC Trading is simply trading crypto assets directly between two parties in a closed trading market. This trading market is unlike an exchange where there are several prices. Here, the parties involved only have the private price they show and can negotiate deals based on the amount each party has or is interested in buying. Imagine a picture of two persons involved in private trading negotiations. On the one hand, one person is available to sell assets at a given price, and on the other hand, the other is willing to buy assets at a given price.

An OTC trade occurs when both parties agree on the trade price or exchange for which they agree. A trade can be crypto-to-crypto (For example, swapping bitcoin with tether) or fiat-to-crypto (For instance, swapping XAF or Rand for bitcoin and vice versa). Whether crypto-to-crypto or crypto-to-fiat, the need for a “trading market or desk” to effect the transaction is imperative. OTC trading markets or desks are professional platforms dealing directly with crypto buyers or sellers. They could be an OTC Trading Principal Desk or Agency Market.

Difference Between Principal and Agency OTC Trading Market

Trading with principal desks or OTC trading markets entails using funds to purchase requested assets upon request of their customers. This, by extension, implies that the OTC trader is assuming risk in the process on behalf of their customer.

Here is how it happens: After placing a request through a chat application, one of the market traders responds with a price based on current market rates and conditions. At this point, you (the customer) can decline, counter (negotiate) or accept. Upon mutual agreement, the OTC trading market commits to deliver the asset, per a legal agreement signed during the onboarding process.

Then, the otc trader or OTC trading market provider searches within its network to determine the best way to purchase the requested assets. The fact that the OTC trading market is using its funds to buy a customer's assets is risky because there is a high probability that prices will start spiking higher before they can attain the customer's request.

This is also disadvantageous to the principal otc trader, given that they aim to purchase all the ordered assets for an average price slightly under the market price in order to make a profit. If the OTC trading market successfully buys all the requested assets, the customer receives instructions on where and how to make payments for the assets. Thus, the OTC trader only sends the assets purchased after the customer has made payment.

Contrary to the Principal OTC trading market, the Agency type OTC trading markets do not trade with their own funds and, thus, do not assume market risk. Here, customers have to pay a fee to the OTC trading market, permitting it to act as a middleman on their behalf.

For instance, If you were to buy any assets from an OTC trading market Agency, you would first fund an account with them and then offer a range for which you are willing to purchase the assets. The OTC trading market agency will then attempt to buy assets with the customer's funds at an agreed-upon price. In this case, the risk falls on the customer because the price of assets (BTC or USDT) may increase before the OTC trader can complete the purchase. If this were to happen, the trader would not fulfil the customer's request until updates are made.