I get asked these questions a lot – what’s the difference between OTC trading and trading on an exchange? Why should I choose one over the other?
Here’s the answer to help you make informed decisions:
1. Exchange Trading:
Transparency: Public exchanges offer transparency with real-time pricing and order book visibility.
Smaller Liquidity: Enough liquidity that allows for quick execution of small trades.
High Market Impact: Trades follow standardized processes and are subject to market volatility.
Strict Standards: Exchanges operate under processes that cannot be altered or modified by any single investor such as limited payment methods, strict KYCs and limited volume.
2. OTC Trading:
Privacy: OTC trades occur off-exchange, providing enhanced privacy and confidentiality for counterparties.
Deep Liquidity: OTC trades are designed to cater for the needs of larger volume traders, hence, it’s easy to access liquidity of any amount.
Reduced Market Impact: Large transactions can be executed without impacting market prices since they are conducted off-market.
Customization: Terms are negotiable, allowing for tailored pricing and payment terms.
💡Choosing the Right Approach:
Private and Large Transactions: OTC trading is ideal for executing large buys or sells that require privacy.
Speed and Transparency: Exchange trading suits investors needing quick trades and transparent pricing.
Risk Management: Consider the counterparty risk in OTC and market volatility in exchange trading.
Understanding these distinctions can help you to choose the trading method that aligns with your investment goals and risk tolerance.
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