The Stock and Bond Markets
This article discusses over-the-counter (OTC) markets and their role within the primary and secondary markets we discussed earlier. OTC markets are not subject to the same regulations as primary markets. OTCs are considered secondary markets, like stock exchanges such as the New York Stock Exchange (NYSE). These two secondary markets differ in that OTCs are decentralized markets, like NASDAQ, while stock exchanges are centralized and allow traders to meet and conduct their trading activities. What are the different financial markets?
Stock and Bond Markets
Over-the-Counter Markets
A special type of secondary market is the 'over-the-counter (OTC) market'. In contrast to the stock exchange, OTC markets are not physically recognisable: they are better described as networks of trading relationships between dealers. Moreover, unlike exchanges, OTC markets are not subject to strict regulation about the quantity and quality of the assets traded, and all the contracts are bilateral, i.e. only between two parties. Given these characteristics, OTC markets lack transparency compared to the ones discussed so far.
Financial instruments, such as stocks, debt securities, derivatives, and commodities can be traded OTC. Typically, small companies lacking the resources to be listed on formal stock exchanges trade their stocks OTC. However, even larger companies might decide to trade their stocks OTC.