Over-the-Counter Trading Depth Analysis: Why the OTC Market Has Become Investors' New Battlefield

Why Investors Need Over-the-Counter (OTC) Trading

What should you do when you discover a company with investment potential but can’t find any trace of it on mainstream exchanges? The answer lies in OTC trading (Over The Counter). This “over-the-counter market” trading system is transforming the global investment ecosystem.

OTC trading attracts investors because it offers flexibility that centralized markets cannot provide. Rather than being a replacement for traditional exchanges, it complements them—accommodating companies that do not meet listing standards but have growth potential, as well as a wider variety of investment instruments.

What is OTC Trading? How Does the Over-the-Counter Market Work?

OTC trading refers to investors buying and selling directly through banks, brokerages, phone, or electronic systems, rather than on centralized exchanges. This market is also called “over-the-counter trading” or “OTC market.”

Unlike the unified bidding mechanism of centralized markets, OTC prices are negotiated directly between buyers and sellers. Market participants are highly diverse—ranging from large financial institutions, small brokerages, corporations, to individual investors.

Companies suitable for OTC trading generally fall into two categories: one, small to medium-sized enterprises and startups that do not meet listing requirements; and two, companies that are qualified for listing but choose OTC trading to avoid the pressures of extensive information disclosure. With the development of the internet, the OTC market has rapidly expanded and has become an important choice for global investors.

Types of Products Traded in the OTC Market

The variety of products in OTC markets far exceeds expectations:

Stocks and Bonds: Not only include stocks of small companies but also large-issue, infrequently traded bonds.

Financial Derivatives: Options, futures, swaps, and other contract-based trading.

Foreign Exchange and Crypto: Various currency trades and popular digital assets can be traded OTC, especially suitable for large-volume purchases.

Other Assets: Commodity futures, non-standardized financial products, etc.

OTC Trading Process and Trading Rules

Taking Taiwan as an example, the OTC market mechanism is similar to that of listed markets, with differences mainly in company size and listing standards.

Trading Process: Investor → Place order via broker → Entrustment sent to OTC matching system → Matched based on price priority and time priority.

Trading Hours: Pre-market (08:30–09:00), Regular trading (09:00–13:30), After-hours pricing (13:40–14:30), with a call auction every 5 seconds.

Core Rules:

• Price fluctuation limit ±10% (same as listed markets)
• Call auction mechanism
• Automatic matching trades
• T+2 settlement system

Companies must comply with disclosure regulations, releasing quarterly and annual reports and major news, ensuring transparency higher than the emerging OTC markets, allowing investors to access sufficient information. Due to better liquidity and the same system as listed markets, ordinary investors face relatively low participation barriers. However, small companies are more susceptible to news and shareholding influences, leading to higher stock price volatility risks.

The Role of Taiwan OTC Index and OTC Center

Taiwan’s stock market is divided into the “Stock Exchange” and the “OTC Center.” The OTC index (OTC Composite Index) compiled by the OTC Center reflects the state of the OTC stock market and is an important reference for the trend of small and medium-sized stocks.

This dual-structure design aims to: listed companies must meet certain scale standards, but overly strict requirements could hinder startup development. To balance this, the government established the OTC Center, relaxing listing conditions—companies only need to be recommended by more than two licensed brokerages to list, and if their performance improves within six months, they can apply for transfer to the main or OTC markets.

However, lenient entry criteria have also attracted many dubious companies and unscrupulous brokerages, which promote high-risk stocks (commonly pink sheets) to harvest profits—highlighting the importance for investors to carefully choose their brokers.

Fundamental Differences Between OTC and On-Exchange Trading

The reason for the existence of on-exchange trading is to set “standards.” In contrast, OTC trading is closer to the fundamental economic law of supply and demand:

Product Standards: On-exchange trading, like bank currency exchange services, has uniform standards; OTC trading, like pawnshops, varies by provider but offers more product types.

Trading Mode: On-exchange trading is transparent and fair but offers limited profit margins; OTC allows buyers and sellers to set prices freely, with information being more critical than capital.

Product Variety: On-exchange products require standardization and are fewer; OTC products are highly diverse.

Regulation and Security: On-exchange markets are government-approved and regulated; OTC markets are operated by brokerages with varying standards, requiring investors to discern.

Liquidity and Information: On-exchange markets have high liquidity, attracting international capital; OTC markets have lower liquidity, larger information gaps, where informed traders can earn excess returns, and uninformed traders may suffer excess losses.

Advantages of OTC Trading: Opportunities and Flexibility

✔️ Broader Investment Options: Access to derivatives, binary options, CFDs, forex, and more, covering a wide market spectrum.

✔️ Flexible and Diverse Trading: Products and trading methods can be tailored to investment goals, unconstrained by uniform rules.

✔️ More Leverage Options: OTC offers significantly higher leverage than traditional markets, amplifying profit potential.

✔️ Gradual Market Regulation: Modern OTC markets incorporate multiple safety layers, approaching centralized markets; many brokerages operate under licensed regulation from reputable financial institutions.

Risks of OTC Trading: The Truth Investors Must Know

High returns in OTC trading come with real risks:

❌ Lack of Regulation: No unified rules, limited transparency, and lax legal oversight. Many fraudulent brokers operate here, while listed companies must adhere to strict regulations.

❌ Low Liquidity: OTC securities are less liquid than centralized exchanges, making it difficult to execute trades at desired prices, risking transaction failure.

❌ Market Volatility: OTC investors often lack the transparent information of centralized markets, leading to higher volatility and price risks.

❌ Counterparty Credit Risk: Direct transactions mean if the counterparty defaults, investors may find it hard to recover losses.

❌ Information Asymmetry Risk: Malicious actors may use false information to deceive investors into participating.

Is OTC Trading Really Safe?

Does the absence of exchange regulation mean unsafe? Not necessarily.

While OTC trading indeed carries higher risks, they are not unmanageable. The key lies in investor choices:

Primary Condition: Ensure brokers are safe and reliable, regulated by multiple authorities, with strong risk management mechanisms.

Secondary Considerations: Choose mature trading instruments (like forex), thoroughly understand spreads, liquidity, withdrawal mechanisms, and conduct comprehensive assessments.

Protection Measures: Legitimate platforms often have investor protection mechanisms, including risk assessments, KYC procedures, complaint channels, which help reduce risk exposure.

OTC trading is not a beast to fear but a market requiring investors to have risk awareness, good selection skills, and self-protection consciousness. Those who understand the rules, choose brokers carefully, and are aware of risks can achieve higher profit potential in OTC trading. The key is: Know yourself and your opponent, and you will win every battle.