What is OTC trading?

OTC stands for over-the-counter—literally, “bypassing the counter”. The term refers to off-exchange trading conducted directly between clients and market makers. In such deals, the seller and buyer transact with each other, usually with the assistance of third parties. For a long time OTC trading was a mainstay of traditional finance; by 2018 it had also found broad use in cryptocurrencies.

Market participants may opt for OTC rather than traditional exchanges for reasons including price stability, execution speed, security and confidentiality.

When trading on an exchange, executing a large transaction typically requires many small orders, each potentially at a different price. Liquidity and volatility at the time determine the number of fills and the price dispersion. The price swings common in crypto markets can materially raise trading costs and harm participants.

In OTC trading, clients execute a single large deal, improving efficiency and avoiding the challenges of filling across multiple venues. The transaction does not appear in an exchange order book and is not publicly visible, offering greater confidentiality.

A significant share of crypto funds was raised through token campaigns launched in 2017 and early 2018. For example, Element Group helped its clients raise more than $500 million. Clients of the OTC trading service The Element Group receive professional, innovative risk management as well as liquidity and capital solutions. For companies in the post-ICO phase, active management of raised funds is a key challenge, and an OTC trading service can offer tailored, well-thought-out solutions.

In the crypto world, OTC trading long remained the preserve of large players and “whales”, but several factors have driven a recent rise in interest and broader industry adoption. Mainstream crypto exchanges are known for vast queues of unverified users, so OTC services are moving into the “mid-market” with orders of $100,000 and above. This is especially relevant given the difficulty of depositing and withdrawing fiat from exchange accounts and constantly shifting regulatory regimes. Once the regulatory field becomes clearer, large players will need tools with the liquidity and risk-management attributes of the OTC market.

As cryptocurrencies encounter regulation, security guidelines and other tests, they will be better prepared to compete with traditional investments. Rising institutional demand requires deeper and more consistent liquidity. Crypto exchanges often cannot meet these liquidity requirements, giving further impetus to the expansion of the OTC market.

OTC firms provide solutions to issues of liquidity, pricing and information discovery. This focus on delivering a single price or solution, and on working with each client individually, creates a client-centric environment that extends services into new areas: from escrow to lending and syndication.

The best OTC providers adapt to developing and uncertain markets, balancing confidence with humility, and offer clients consistently competitive services and liquidity.

A key factor when comparing providers should be their ability to execute in fast-growing markets characterised by high volatility, illiquidity and algorithmic trading prowess.