OTC trading: what is it and how do you begin?
Over-the-counter (OTC) trading refers to the process where financial instruments are traded directly between two parties. Learn how to start OTC trading with us.
Call 0800 195 3100 or email newaccounts.uk@ig.com to talk about opening an account.
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Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We’re available from 9am to 5pm (UK time), Monday to Friday.
Contact us 0800 409 6789
Call 0800 195 3100 or email newaccounts.uk@ig.com to talk about opening an account.
Contact us 0800 195 3100
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We’re available from 9am to 5pm (UK time), Monday to Friday.
Contact us 0800 409 6789
What is over-the-counter (OTC) trading?
Over-the-counter (OTC) trading refers to a decentralised market where financial instruments are traded directly between two parties, often via a broker (like us), without the supervision of a centralised exchange. Popular ways of trading OTC in the UK include spread betting and contract for difference (CFD) trading.
In OTC markets, deals are typically conducted via computer networks or phone, rather than on a centralised exchange. This structure enables you to trade a wide range of assets, including securities that aren’t listed on an exchange.
One of the key characteristics of OTC trading is that it's not standardised. Unlike when taking positions on exchange, OTC trades can be tailored to meet the needs of the parties involved. However, the level of customisation available generally depends on the specific offerings of the broker, if one is involved. We provide several ways for you to tailor your OTC trades, eg by offering different expiration dates on relevant instruments. This flexibility is especially valuable for complex financial instruments or large-scale transactions.
However, this flexibility comes with increased risks. OTC markets generally have less transparency and liquidity compared to exchange-traded markets. This can lead to wider bid-ask spreads and potentially higher volatility, requiring traders to exercise additional caution and due diligence.
We offer a range of OTC trading options for you. Through our flagship platform, you can engage in spread betting and CFD trading on a wide variety of markets. We act as the counterparty in these OTC transactions, providing you with the flexibility and customisation that OTC trading offers. Our advanced trading tools and expert support are designed to help you navigate the complexities of OTC markets.
Benefits and risks of OTC trading
Here are some of the key benefits and risks of OTC trading.
Benefits of OTC trading
Greater flexibility in negotiating trade terms
Access to a wider range of assets, including non-listed securities
Potential for higher returns (with higher risk) due to factors like lower liquidity (compared to on-exchange trading) that can lead to higher volatility
Less regulatory oversight compared to exchange-traded markets
Risks of OTC trading
Limited public information is available on tradeable assets (we aim to provide as much data – that could be useful in supporting your trading decisions – as is reasonably possible)
OTC markets can have lower liquidity. Our deep liquidity pools can help minimise this risk, but it's still a factor to consider
Higher counterparty risk (ie default risk)*
Less stringent regulatory requirements
How to start trading over the counter
Understand the markets: research and familiarise yourself with OTC trading and various asset classes like stocks, commodities, options and bonds. You can use the educational tools and materials available under 'analyse and learn' and IG Academy
Open an account: create a new account or log in if you're an existing user
Practise with a demo account: familiarise yourself with our flagship platform and test strategies without risking any real capital
Create a trading plan: outline important factors such as your strategy, goals, risk tolerance, how you'll manage your risk and the markets you'll trade
Start small: consider starting with modest position sizes when you transition to trading with real money
Gradually increase exposure: as you gain experience and confidence, you can slowly expand your trading activities as you see fit
Monitor and manage risks: regularly track your trades and market conditions to manage your positions
Continuously educate yourself: stay informed about market trends and refine your strategies
Popular OTC markets
The OTC structure offers flexibility and diverse opportunities across various sectors, providing traders with a wide range of markets to choose from, including:
Our analyst’s tips for OTC trading
By Axel Rudolph
When trading OTC markets, it's essential to understand that these are decentralised and less regulated, creating both opportunities and risks. Our senior technical analyst Axel Rudolph suggests:
When trading OTC markets, it's essential to understand that these are decentralised and less regulated, creating both opportunities and risks. Our senior technical analyst Axel Rudolph suggests:
Due diligence and research
When engaging in OTC trading, it's crucial to approach the market with caution and a well-informed strategy. One of the most important tips is to conduct thorough due diligence on any company or instrument you're considering. Given the reduced transparency in OTC markets, this research is even more critical than for exchange-traded securities.
Liquidity and price movements
OTC markets can be less liquid than those traded on exchange, which can lead to wider bid-ask spreads and, potentially, volatile price movements. Be prepared for the possibility of slippage and factor this into your trading decisions.
Risk management and diversification
Given the potential for higher volatility and counterparty risk,* it may be beneficial to use stop-loss orders and to diversify your portfolio. It's important to assess your risk tolerance and risk only a portion of your capital that aligns with your overall financial goals and situation.
Starting points
For those new to OTC trading, starting with more established OTC markets like foreign exchange (forex) could be a good entry point. These markets tend to have higher liquidity and more readily available information. As you gain experience, you can explore other OTC instruments.
Regulatory awareness
OTC markets are subject to evolving regulations, which can impact trading conditions and requirements. Keeping abreast of these changes may be helpful in navigating the markets.
|
OTC |
On exchange |
Structure of the market |
Decentralised and allows for customised agreements between parties |
Occurs on a centralised platform with standardised contracts |
Transparency |
May have less price transparency, which can make it challenging to determine fair market value |
May have less price transparency, which can make it challenging to determine fair market value |
Regulation |
While still regulated, often has less stringent requirements |
More stringent: exchanges have specific listing requirements and are subject to oversight by regulatory bodies |
Liquidity |
Can be less liquid, particularly for less popular instruments |
Can be less liquid, particularly for less popular instruments |
We offer both OTC and on-exchange trading options to cater to different trading needs and strategies. Our OTC offerings include spread betting and CFD trading. For on-exchange trading, we provide US options and futures.
By providing both methods, we ensure you have the flexibility to choose the approach that best suits your trading goals. Remember, each trading approach comes with its own set of risks. Make sure you understand these risks and how to manage them.
FAQs
What is OTC trading?
OTC (over-the-counter) trading refers to direct transactions between two parties, that are often handled through a broker, without the supervision of a formal exchange. It generally allows for more flexible trading of various financial instruments, including stocks, bonds, commodities and derivatives such as options and futures.
What are the advantages of OTC trading?
OTC trading offers benefits such as greater flexibility in deal terms, access to a wider range of securities and the potential for higher returns. However, it's also important to consider the associated risks. These can include reduced liquidity compared to exchange-traded markets, potentially higher counterparty risk* and less transparency in pricing and trading volumes.
What is an example of OTC trading?
A common example of OTC trading is the forex market, where currencies are traded directly between parties without a central exchange.
What are the hours for OTC trading?
OTC trading hours vary depending on the market. For instance, the forex market operates 24 hours a day, five days a week, while other OTC markets’ hours may differ.
Is the OTC market safe?
Yes, OTC markets can be safe, but like any financial market, they come with inherent risks. While operating under different structures (compared to major exchanges), OTC trading is still subject to regulatory oversight.
Your broker can enhance safety by complying with regulations and putting other necessary measures in place (eg segregation of client funds and making risk management tools readily available). To further enhance safety, you can do your own due diligence, employ risk management strategies and conduct thorough research.
What is an over-the-counter derivative?
An over-the-counter (OTC) derivative is a customised financial product, like a spread bet or a CFD, that’s traded directly between two parties – usually via a broker – outside of formal exchanges. These products are a key component of OTC markets and make it possible for traders to get exposure to underlying assets.
* When trading with us, counterparty risk is limited based on the terms and agreements that govern our relationship with you.
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