OTC trading: what is it and how do you begin?

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

1. 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

2. Open an account: create a new account or log in if you're an existing user

3. Practise with a demo account: familiarise yourself with our flagship platform and test strategies without risking any real capital

4. 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

5. Start small: consider starting with modest position sizes when you transition to trading with real money

6. Gradually increase exposure: as you gain experience and confidence, you can slowly expand your trading activities as you see fit

7. Monitor and manage risks: regularly track your trades and market conditions to manage your positions

8. 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:

• Forex

• Commodities

• Stocks

• Exchange-traded funds (ETFs)

• Indices

• Derivatives like options and futures

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.