Over-the-Counter Trading Complete Guide: How the OTC Market Works and Investment Opportunities Analysis

When investors look for investment opportunities, they often find that many promising companies are not listed on mainstream exchanges. At this point, over-the-counter (OTC) trading becomes the key to opening new investment doors. Due to its flexible trading methods, diverse product options, and customizable trading sizes, OTC trading has attracted increasing attention from investors. Although OTC markets lack regulation compared to centralized exchanges, with the right trading strategies, investors still have the chance to discover more profit opportunities. This guide will analyze the mechanisms, features, and risks of the OTC market to help investors make informed decisions.

OTC vs. On-Exchange Trading: Five Key Differences at a Glance

Before discussing OTC trading, it’s essential to understand its fundamental differences from on-exchange trading. OTC and on-exchange markets differ significantly in product specifications, trading modes, and regulatory approaches.

Product Characteristics:

On-exchange trading mainly involves standardized products, each with uniform specifications and pricing; OTC trading, on the other hand, involves non-standardized, more flexible trading items. For example, buying and selling gold on an exchange is like handling it at a bank—each bank’s standards are identical—whereas OTC trading is like pawnbroking—each shop’s conditions vary, but the variety of tradable items is richer.

Trading Mechanisms:

On-exchange trading uses a call auction system, with transparent and public processes where buyers and sellers cannot negotiate prices directly. OTC trading involves negotiated deals, where buyers and sellers can directly agree on prices. This means that in OTC markets, the same company’s stock might be sold at different prices to different buyers, making information and pricing advantages crucial.

Liquidity and Trading Volume:

On-exchange markets attract large trading volumes and high liquidity due to strict regulation and market centralization, drawing international capital. OTC markets, being more dispersed, tend to have lower liquidity, and large transactions may face unfavorable prices.

Regulatory Environment:

Exchanges are government-approved and strictly regulated by the authorities. OTC markets are operated by brokers or online platforms with relatively looser regulation; some OTC platforms, though regulated, are set up by fraudulent entities to conduct scams.

Trading Methods and Risk Control:

On-exchange markets have strict risk controls, limiting leverage and short-selling. OTC trading offers fewer restrictions, with more diverse trading methods, allowing investors to adjust leverage according to their needs and implement more flexible strategies.

The Truth About Taiwan’s OTC Market: Why Companies Choose Listing Over OTC

Taiwan’s stock market is divided into the “Stock Exchange” and the “OTC Market” (Gretai Center). The OTC market, led by the OTC (Gretai) Center, reflects the overall condition of Taiwan’s small- and medium-sized stocks through its OTC Index (also called the Gretai Index). Many investors observe this index to gauge OTC market trends.

Initial Intent and Reality of Market Segmentation:

The government established two markets to ensure listed companies have a certain scale, but overly strict listing requirements hinder many companies’ growth. Many startups possess innovative ideas and potential but lack initial funding to start projects. To address this, the government created the OTC Center, relaxing listing conditions—companies only need recommendations from two or more approved brokers to qualify. If within six months they show results (such as turning profitable or improving financial health), they can apply to upgrade to a formal listing.

Market Ecosystem Duality:

Because the application process is relatively simple, besides genuine promising companies, many less reputable firms also seek OTC listing. The market still has opportunists and unscrupulous brokers who recommend high-risk stocks and manipulate prices to profit—this is known as “pink sheet” trading, depicted in movies like The Wolf of Wall Street. This reminds OTC investors that selecting the right target is crucial, and choosing reputable brokers is even more important.

How OTC Trading Executes: From Order Placement to Matchmaking

Taiwan’s OTC market operates similarly to the listed market, with differences mainly in company size and listing standards. The OTC trading process includes:

Step 1: Investors place orders through brokers

Buying or selling OTC stocks is identical to trading listed stocks, requiring no special procedures or additional account features.

Step 2: Orders enter the matching system

When investors submit buy or sell orders, brokers upload these to the Gretai Center’s automated trading system (ATS). The system automatically matches orders based on “price priority, time priority,” executing trades with counterpart orders. The entire process follows the same technical rules as the listed market.

Trading Schedule and Rules:

• Call auction every 5 seconds (same as listed markets)
• Price limit: ±10% (same as listed markets)
• Settlement: T+2 (same as listed stocks, settlement occurs two business days after trade)

Features of OTC Trading:

OTC trading operates identically to on-exchange trading, with price limits, call auction mechanisms, matching systems, and daily trading hours. After listing, companies must comply with disclosure requirements, including quarterly and annual reports and major news, making OTC markets more transparent than OTC “Gretai” markets, providing investors with relatively ample information.

What Products Can Be Traded OTC: Stocks, Forex, Cryptocurrencies, and More

The OTC market offers a much broader range of products than on-exchange markets, including:

Stocks: OTC stocks include two categories—those already listed on the exchange and those from small or startup companies that do not meet listing criteria or have not applied for listing. This provides opportunities to access high-growth potential companies.

Bonds: OTC markets are more suitable for bond trading due to the large issuance volume, diverse types, and infrequent trading. The flexibility of OTC better meets market needs.

Financial Derivatives: Options, futures, and spread contracts are widely traded OTC, allowing investors to choose derivatives based on their risk appetite.

Foreign Exchange: Currency trading platforms operate OTC, with 24-hour trading and high liquidity.

Cryptocurrencies: Major cryptocurrencies are traded OTC, with the advantage of enabling large-volume purchases that are often difficult on dedicated crypto exchanges.

The Advantages and Risks of OTC Trading: Key Factors Before Investing

Core Advantages of OTC Trading:

✔️ Broader Investment Options—OTC markets provide access to more investment forms, including derivatives, binary options, CFDs, and forex, vastly expanding market choices.

✔️ More Flexible Trading Methods—OTC products and trading modes are more adaptable, allowing investors to customize according to their goals.

✔️ Richer Leverage Options—Unlike the limited leverage in traditional on-market trading, OTC offers multiple leverage choices, enabling higher leverage to amplify gains.

✔️ Enhanced Security Measures—Modern OTC markets have multi-layered security protocols similar to centralized markets. Many brokers, licensed and regulated by reputable financial institutions, offer professional services.

Main Risks of OTC Trading:

❌ Looser Regulation—OTC markets lack unified rules and transparency, making them more susceptible to fraud by unscrupulous brokers. Many companies that cannot meet on-market listing standards can only trade OTC, requiring investors to be cautious.

❌ Lower Liquidity—OTC securities tend to have lower liquidity than on-market stocks, risking unfavorable prices during large transactions.

❌ Market Risks—Similar to stocks, OTC investments are affected by market volatility. However, OTC investors often lack the transparent information available in on-market trading, increasing the risk of information asymmetry.

❌ Counterparty Credit Risk—Some OTC products are highly volatile with low liquidity, exposing traders to counterparty default risk. Additionally, malicious actors may use false information to deceive investors.

Is OTC Trading Truly Safe? Three Key Factors to Identify Legitimate Platforms

Many believe OTC trading is inherently unsafe due to the lack of centralized exchange regulation, but this is not entirely true. Compared to on-market trading, OTC does carry risks, but these are manageable.

Root Causes of OTC Risks:

OTC trading lacks a unified market and rules, so prices are negotiated, meaning the same stock might be offered at different prices to different buyers. Investors face counterparty credit risk, high volatility, low liquidity, and potential scams by fraudsters using false information.

Three Critical Factors for Ensuring OTC Safety:

1. Choose well-regulated brokers—This is the top priority. Legitimate brokers should be regulated by multiple authorities and have strong risk management. Verify if the platform holds internationally recognized licenses, such as ASIC (Australia), CIMA (Cayman Islands), FSC (Mauritius).

2. Select mature trading products—Prioritize high-liquidity, long-established products like forex and mainstream cryptocurrencies. Understand key details such as spreads, liquidity levels, and deposit/withdrawal convenience.

3. Use platform investor protection measures—Reputable platforms offer risk assessments, KYC procedures, complaint mechanisms, and other protections to reduce trading risks.

How to Choose a Legitimate OTC Platform: A Smart Guide

For ordinary investors, the safety of OTC trading ultimately depends on the platform’s legitimacy and reliability. A quality OTC platform should have the following features:

Transparent Regulatory Background—The platform should hold multiple licenses from different countries and clearly display regulatory information. For example, some platforms are licensed by ASIC, CIMA, FSC, indicating compliance with international standards.

Rich Product Line—A top-tier platform offers over 400 investment options, including US stocks, forex, cryptocurrencies, commodities, and more, catering to diverse investor needs.

Comprehensive Risk Management Tools—Features like limit orders, negative balance protection, and other risk controls help investors manage risks effectively.

Transparent Trading Costs—Good platforms often offer commission-free trading, reducing costs for investors.

Flexible Trading Modes—Support for long and short positions, adjustable leverage, 24-hour global trading, and other features provide maximum trading freedom.

By properly identifying and selecting regulated OTC platforms, investors can avoid most risks and fully leverage the flexibility of OTC markets, opening up broader investment opportunities. The future of OTC trading depends on choosing platforms with proper regulation, transparent operations, and strong investor protections to achieve a safe and efficient trading experience.