From the Over-the-Counter Market to Investment Decisions: Is OTC Trading Really Worth Participating In

When investors cannot find their desired assets on mainstream exchanges, the over-the-counter (OTC) market becomes another window of opportunity. As an important part of the global financial system, OTC markets attract countless investors with their flexibility and diversity, but hidden risks should not be underestimated. What exactly is over-the-counter trading? How does it operate? How does it differ fundamentally from on-exchange trading? This article will provide an in-depth analysis.

Core Definition and Characteristics of OTC Trading

Over The Counter (OTC) refers to the behavior of investors bypassing centralized exchanges and directly buying and selling securities and financial products through dispersed channels such as banks, brokerages, phone calls, and electronic systems. This type of trading is also known as “over-the-counter trading” or “OTC trading.”

Unlike on-exchange trading, where prices are generated through unified market bidding, OTC prices are entirely negotiated between the two parties. The counterparties are diverse—they may include banks, securities firms, corporations, or individual investors.

Companies engaging in OTC trading generally fall into two categories: one, small to medium-sized enterprises or startups that do not meet exchange listing qualifications; two, companies that meet listing criteria but choose OTC trading proactively—possibly to avoid the competitive pressure of excessive information disclosure. Over the past decade, with the development of the internet and the expansion of international financial markets, OTC trading has grown rapidly and has become the preferred method for many investors.

However, the convenience comes at a cost: OTC prices are less transparent, and the market lacks strict trading rules and information disclosure requirements, making the risks relatively higher, with counterparties facing credit risk.

Overview of OTC Market Products

The OTC market is not limited to stocks; its product diversity far exceeds that of on-exchange trading:

Stocks: Besides stocks of listed companies, it also includes stocks of small companies and startups that do not meet listing requirements or have not applied for listing.

Bonds: Due to the large issuance volume, variety, and infrequent trading, OTC markets are more suitable for trading various bonds compared to on-exchange markets.

Derivatives: Options, futures, spread contracts, and other derivatives can all be traded OTC.

Foreign Exchange: Currency trading on various platforms is essentially OTC trading.

Cryptocurrencies: When trading mainstream cryptocurrencies OTC, investors can purchase large quantities of assets in one go, which is often difficult to achieve on dedicated crypto exchanges.

How Taiwan’s OTC Market Operates

Taiwan’s stock market is divided into two segments: the “Stock Exchange” (on-market) and the “OTC Securities Exchange” (off-market). To reflect the overall status of the OTC market, the OTC Securities Exchange compiles the OTC Index (also called the OTC Composite Index), which many investors observe to gauge the trend of small and medium-sized stocks.

Taiwan OTC Operation Process

Step 1: Investors place orders through their broker, following the same process as purchasing listed stocks.

Step 2: The order is uploaded to the OTC Securities Exchange’s Automated Trading System (ATS), which matches trades based on “price priority, time priority.” The entire process and technical rules are synchronized with the listed market, requiring no additional steps.

OTC Stock Trading Rules

Features: A call auction occurs every 5 seconds; price fluctuation limits are ±10% (same as listed stocks); mechanisms such as price limits, call auctions, matching trades, and daily trading hours are fully implemented.

Companies listed on OTC must comply with information disclosure regulations (quarterly reports, annual reports, major news, etc.), making transparency higher than that of emerging stocks. Settlement follows T+2, identical to listed stocks.

Differences Between On-Exchange and OTC: Seven Dimensions

On-exchange and OTC trading are like different economic systems— the former with strict rules and order, the latter closer to the original supply and demand laws.

① Product Specifications

On-exchange trading involves standardized products, while OTC trading is non-standardized. For example, gold trading—on-exchange like a bank (standardized), OTC like a pawnshop (each with different conditions). Pawnshops can trade a wider variety of goods.

② Trading Modes

On-exchange uses auction-based trading; OTC uses negotiated trading. The transparency of on-exchange trading offers fairness but limits profit margins. OTC has no such transparency constraints; buyers and sellers negotiate prices directly—making information more valuable than capital.

③ Product Types

On-exchange mainly involves standardized securities and futures; OTC covers forex CFDs, cryptocurrencies, unlisted stocks, and more diverse assets. Since on-exchange requires a certain market scale, product variety is relatively limited.

④ Platforms and Regulation

On-exchange markets are authorized and regulated by the government; OTC markets are operated by general brokerages, with only some under formal regulation. This creates risks—fraudulent operators may set up fake exchanges for scams. Investors must choose platforms that are government-approved and regulated.

⑤ Transparency Differences

On-exchange provides public trading prices and volumes; OTC markets may not disclose such information. This information gap creates opportunities for those familiar with the rules to earn excess profits but also exposes less-informed investors to higher risks of loss.

⑥ Liquidity Comparison

On-exchange markets have high trading volume and liquidity, attracting international capital; OTC markets have lower volume and liquidity, potentially making it difficult to exit positions quickly.

⑦ Trading Flexibility

On-exchange trading methods are restricted (strict risk controls, leverage, short-selling limits); OTC trading is more flexible, with fewer restrictions on leverage and short-selling, allowing for more diverse strategies.

The Double-Edged Sword of OTC Markets: Advantages and Risks

Advantages of OTC Trading

✔️ Broader Investment Options: OTC trading provides access to derivatives, binary options, CFDs, forex, and more, offering a wide range of investment choices.

✔️ More Flexible Trading: Product specifications and trading methods can be customized, allowing investors to adjust strategies flexibly according to their goals.

✔️ High Leverage: Traditional markets often have low leverage and many restrictions; OTC markets offer higher leverage options, amplifying potential gains.

✔️ Gradually Improving Security: Legitimate OTC markets have optimized multi-layered security mechanisms similar to centralized markets. Some brokers are authorized and regulated by reputable financial institutions, enhancing professionalism.

Hidden Risks

❌ Lack of Regulation: OTC markets lack unified regulations; laws and oversight are relatively lax, making fraud more likely. Many companies that do not meet on-market requirements can only trade OTC, making risk assessment difficult.

❌ Insufficient Liquidity: OTC securities have much lower liquidity than centralized exchanges, and investors may face difficulty executing trades at desired prices or even encounter no counterpart willing to buy/sell.

❌ Market Volatility Risks: OTC investors lack the transparent information available on exchanges, making it hard to accurately judge market trends and increasing vulnerability to sudden fluctuations.

❌ Credit and Fraud Risks: Transactions are directly between counterparties with little regulatory oversight. Malicious actors may use false information to deceive investors, and some assets are highly volatile with low liquidity.

Is OTC Trading Really Safe?

Lack of exchange regulation does not necessarily mean unsafe, but OTC trading indeed carries higher risks than on-exchange trading. Without a unified market and rules, sellers can quote different prices to different buyers, exposing investors to counterparty credit risk, price volatility, and liquidity risks.

Key Steps to Ensure Safety

First: Ensure the broker is secure, regulated at various levels, and has strong risk management.

Second: Choose mature trading products (like forex), and thoroughly understand spreads, liquidity, withdrawal procedures, etc.

Third: Prioritize legitimate trading platforms that typically offer investor protections such as risk assessments, KYC procedures, complaint mechanisms, which help reduce trading risks.

Conclusion: Investment Wisdom in OTC Markets

Taiwan’s OTC index reflects a market with growth potential among small and medium-sized stocks, but risks also increase accordingly. The government’s establishment of the OTC Securities Exchange aims to promote startup development—companies can list if recommended by at least two brokerages, and if their performance improves within six months, they can apply for a transfer to the main board.

This mechanism has a double-edged nature: genuine good projects gain financing opportunities, but unscrupulous companies also exploit the system. Some dishonest brokers even recommend high-risk assets and manipulate stock prices to profit from retail investors—highlighting why investors need not only to select good assets but also to choose reputable brokers.

In the OTC market “mining,” it takes more than courage; knowledge, vigilance, and cautious decision-making are essential. Only by fully understanding the OTC market’s operation, risk characteristics, and your own risk tolerance can you truly profit in this opportunity-and-risk coexistence market.