What’s the difference between exchange and over-the-counter markets?

There’s no doubt that the world’s financial markets are now more accessible than ever before, thanks largely to the incredible rate of technological advancement over time.

For example, investors can now access an array of assets and securities through either exchange or over-the-counter (OTC) markets, each of which offers their own unique advantages and drawbacks.

In this article, we’ll compare both entities while asking what distinguishes them and the respective benefits of each.

The Exchange the Market – The Pros and Cons

The basic ‘exchange’ concept is embodied by major entities such as the FTSE, the NYSE and Nasdaq, which essentially provide a centralised marketplace that’s designed to underpin fair, transparent and efficient trading.

Exchange-traded securities essentially change hands via a licensed exchange platform, with such entities the primary location for the buying and selling of stocks, bonds and similar financial instruments across the globe.

Any instruments traded through an exchange are known commonly as ‘listed securities’, with these entities allowing investors to operate in a more transparent and regulated space over time. 

This makes it the ideal forum for higher value securities, which is why exchange markets remain popular amongst large-scale and institutional investors with capital holdings worth millions.

As you can imagine, however, this type of exchange market is less accessible to smaller investors, which is why high-volume stock and bond trading was historically the preserve of professional investors rather than part-time operators.

What About OTC Markets? What are the Key Considerations?

Conversely, OTC markets host the trading of securities through a licensed deal or broker network, with orders being executed between two parties rather than through a publicly listed exchange.

The foreign exchange offers the most popular type of OTC market, with the digital age having seen the rise of online brokerage platforms that connect traders to the market through a vast array of creative investment vehicles.

For example, you’re most likely to trade forex CFDs through a platform like the MT4, which allows for far greater ease of access to the market and enables you to engage directly in real-time trading. A CFD (contract for difference) is a financial contract that pays the differences in a settlement price between opening and closing trades, allowing investors to speculate on price movements and profit even in a depreciating market. 

In the case of stocks, investing in OTC-listed securities also enables you to get in on the ground floor of a winning, small-cap equity. 

More specifically, you’ll have immediate access to competitively priced stocks with huge growth potential for the future, including tech-led startups that will go onto dominate specific technology niches. OTC markets can also be accessed 24-hours a day, rather than compelling investors to operate within the opening hours of an exchange.

There are downsides to this type of market, however, particularly as prices are typically kept private between the two parties.

Similarly, it can be harder to find information about participating companies and securities, as the rules surrounding OTC markets are less stringent that publicly accessible and global exchanges.