Off book definition

What is an off-book trade?

An ‘off-book’ trade refers to the process of trading shares away from an exchange or regulated body. They are usually executed via the over-the-counter (OTC) market. Off-book transactions are made directly between two parties, outside or ‘off’ of the order books.

Once a price has been agreed between the two parties, it is typical for one of the participants to report the trade and its parameters to the exchange – and wider market – in order to bring the execution 'on exchange'.

When you trade on exchange, the trade takes place directly onto the order book and is seen as increasing visibility for wider market participants.

Example of an off-book trade

Let’s say that you want to buy shares in company ABC, and another party wants to sell the same number of ABC shares. Neither of your brokers have direct access to the order book, so the transaction is executed away from the exchange. This trade was ‘off-book’.

But you both decide to make a trade report, bringing the transaction ‘on exchange’ and creating a public record of the transaction.

If your broker had direct market access (DMA), you could have instructed them to place a buy or sell order directly onto the order book.

Pros and cons of off-book trades

Pros of off-book trades

Off-book orders are not as reliant upon the rules of an exchange or trading system. This means that they can provide a lot more freedom and flexibility for participants to choose their own prices and outline the parameters of their own trade. The counterparties can create a private agreement that suits both of their needs and goals.

Cons of off-book trades

Off-book trades can have a higher risk of counterparty default, as there are very few rules or contractual obligations.

For some off-book trades, there is no official record kept at all. The drawback of this, is that off-book trading is often used by individuals looking to conceal their behaviour from others.

The lack of official regulation can also be a cause for concern, as there is no obligation for either party to report the trade to an exchange or publicise the orders to a governing body. And even when off-book trades are reported, so that they are executed ‘on exchange’, the process can be time consuming and experience significant delays. This is because the exchange doesn’t have to record the trade immediately.