OTC stands for over-the-counter. It describes trading that happens directly between two parties, typically with a dealer or broker as the counterparty, rather than through a central exchange order book.
Prices are negotiated or quoted over phone, chat or electronic request-for-quote systems. Terms can be standard or customised, and reporting and clearing depend on the instrument and the rules in that jurisdiction.
How OTC trading actually works
In an OTC deal, the buyer contacts one or more dealers and asks for a price. The dealer quotes a bid and an offer, often firm for a short window. The client decides whether to trade, the parties confirm the terms, and the trade is settled on an agreed date. This process is common across voice trading and electronic RFQ platforms.
Dealers manage risk by running inventories and hedging. Many act as a market maker, standing ready to buy and sell, earning the spread as compensation for providing liquidity and holding risk. Interdealer brokers can sit in the middle to help banks find each other for large transfers without revealing identities.
Post-trade, a confirmation outlines price, size, settlement date and any special conditions. Some trades are bilaterally settled between the counterparties. Others route to a central counterparty for clearing, or require collateral under a credit support agreement. Reporting to trade repositories or public tapes is required in many markets, but timing and detail vary by region and product.
Where you are likely to see OTC trades
Plenty of major markets are mostly OTC:
- Bonds: Government and corporate bonds usually trade via dealers rather than a central order book. Large blocks are negotiated to avoid moving the market.
- Foreign exchange: Spot FX, forwards and many swaps are transacted directly with banks and non-bank dealers around the clock.
- Interest rate and credit derivatives: Swaps, options and bespoke structures are often negotiated OTC. Some standardised contracts are now centrally cleared in many regions.
- Commodities and energy: Forwards and swaps that fit specific delivery points or calendars are commonly OTC.
- Equities not listed on an exchange: Shares of some companies trade OTC via dealer networks. Quotes are less centralised than for listed shares.
- Crypto block trading: Larger holders may use OTC desks to source size without signalling intentions on public order books. Exact processes vary by provider.
Prices, quotes and transparency in OTC markets
There is no single central order book. Instead, prices live inside dealer quotes and bilateral negotiations. You discover the going level by requesting quotes from several dealers, watching indicative streams, or reviewing post-trade prints where reporting is required.
Spreads are shaped by inventory risk, information risk and the cost of hedging. For small, liquid instruments, OTC spreads can be tight. For large sizes or niche structures, the spread can be wider to compensate the dealer for taking the other side. Quotes may be labelled as firm for immediate execution or indicative when the dealer is showing interest rather than a binding level.
Transparency varies by product and jurisdiction. Some markets publish near real-time prints with size and price. Others report with delays or caps on size to protect large orders. Because there is no open order book, price discovery can be slower and more relationship-driven than on a lit venue.
Risks, costs and protections to consider
Counterparty risk: In a bilateral trade you carry the risk that the other party fails to perform. Collateral arrangements, margining and central clearing reduce this risk for many derivatives, but not all instruments are eligible or required to clear.
Settlement and operational risk: Trades settle to agreed timelines and conventions that differ by product. FX carries settlement risk if payments cross time zones. Careful confirmation and reconciliations are essential.
Liquidity and execution risk: You might not be able to transfer large risk quickly at a single price, so execution can be broken into slices or staged. The benefit is lower market impact compared with advertising your size on a public book.
Costs: Economic cost is mostly in the bid-offer spread, plus any brokerage or platform fees. There is no displayed depth to lean on, so obtaining competing quotes is a common way to benchmark fairness.
Regulatory variation: Reporting, suitability checks, documentation and clearing rules differ across countries and can change. Professional firms maintain legal agreements such as master trading contracts and credit support annexes to govern how trades are valued, margined and settled.
OTC vs on-exchange and off-book trading
Trading on exchange means your order interacts with a venue’s rulebook, public quotes and central clearing. Prices and trades are broadly visible, and the venue manages matching and often guarantees settlement through a clearing house.
OTC sits outside that framework. You face a dealer directly, accept their terms or negotiate, and rely on bilateral settlement unless the product is eligible for central clearing. Transparency is patchier, which can be a feature if you need to move size discreetly.
Do not confuse OTC with off book. An off book trade is negotiated away from the exchange’s order book but still executed or reported under the exchange’s rules. OTC is not governed by an exchange at all, although it may still be reported to a regulator or tape depending on the rules.
In equities, OTC also carries a specific meaning. Some shares are not listed on a national exchange but are quoted by dealers on separate OTC networks. Disclosure standards, liquidity and spreads can differ from listed shares, and coverage by analysts tends to be lighter.
A simple example of an OTC deal
An asset manager wants £5 million of a corporate bond. Posting a visible bid might move the market. Instead, they send an RFQ to five dealers. The tightest offer is 101.20 for full size, good for one minute. The manager accepts, the dealer sells the bonds from inventory or sources them elsewhere, and both sides exchange electronic confirmations. The trade settles on the standard bond cycle through their custodians. The dealer hedges by selling a related bond or using a rates swap to manage duration.
Now picture a large crypto buyer seeking coin without pushing up the exchange price. They contact an OTC desk, agree on identity checks, and request a firm quote for a set quantity. The desk lines up supply across venues and internal inventory, quotes a single all-in price, and arranges settlement to a pre-agreed wallet once funds arrive. The trade never touches the public order book, so market impact is limited, at the cost of a negotiated spread and counterparty exposure to the desk.
In both cases, the defining feature is the same: the trade is negotiated directly with a counterparty rather than matched on a central venue. That flexibility can be useful when you need tailored terms or discretion, provided you understand the different risks and the market conventions that come with OTC trading.