Unlike exchange-traded markets, where standardized contracts are executed on a central trading venue, OTC trading takes place directly between two parties—typically a broker or bank and a client. The foreign exchange market is primarily OTC-based, as are many CFD, derivative, and bond markets.
OTC trading offers flexibility in contract design, maturity, and position sizing. However, it also introduces counterparty risk, since there is no central clearing house acting as a guarantee.
Regulation of OTC markets varies depending on jurisdiction and product type. In practice, OTC trading is conducted via electronic platforms that improve transparency and efficiency.
