The OTC market, or over-the-counter market, is a decentralized marketplace where securities are traded directly between two parties without the use of a central exchange. Here's a detailed breakdown of key aspects of the OTC market:
- Functionality: In the OTC market, buyers and sellers negotiate directly to execute trades, which can be conducted electronically or through a broker-dealer network12.
- Regulation: OTC securities are not subject to the same regulatory oversight as those listed on formal exchanges. The Securities and Exchange Commission (SEC) does provide some regulatory framework, but OTC securities generally have less transparency and are riskier investments34.
- Market Participants: The OTC market is typically dominated by smaller companies that do not meet the listing requirements of major exchanges. These companies can include foreign ordinaries, large-cap American Depositary Receipts (ADRs), and small and micro-cap growth companies3.
- Trading Costs: OTC securities may involve additional costs due to the need for market makers to carry an inventory of securities, which can lead to higher transaction costs and premiums for liquidity32.
- Risks: Investing in OTC securities carries additional risks compared to exchange-traded securities. These include the lack of publicly available information, counterparty risk, and the potential for non-compliance with regulatory requirements35.
In summary, the OTC market is a decentralized trading platform where securities are bought and sold directly between investors or through brokers, with varying degrees of regulatory oversight and transparency. It provides a venue for smaller companies and investors who may not meet the criteria for trading on formal exchanges.
6/19/2024 05:22pm
