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Investment Dictionary:

Over-The-Counter Market

A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market. Also referred to as the "OTC market".

Investopedia Says:
In the OTC market, trading occurs via a network of middlemen, called dealers, who carry inventories of securities to facilitate the buy and sell orders of investors, rather than providing the order matchmaking service seen in specialist exchanges such as the NYSE.

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Accounting Dictionary: Over-The-Counter (OTC) Market

Market for buying and selling securities not listed on organized stock exchanges. The OTC is typically a telephone market, with most business conducted by phone or, now, electronic device. Dealers, called market makers, stand ready to buy or sell specific securities for their own accounts. These dealers will buy at a bid price and sell at an asked price that reflects the competitive market conditions. The OTC market is the largest of all markets in the United States in dollar terms.

 
Britannica Concise Encyclopedia: over-the-counter market

Trading in stocks and bonds that does not take place on stock exchanges. Such trading occurs most often in the U.S., where requirements for listing stocks on the exchanges are strict. Schedules of fees for buying and selling securities are not fixed in the over-the-counter market, and dealers derive their profits from the markup of their selling price over the price they paid. Many bond issues and preferred-stock issues, including U.S. government bonds, are listed on the New York Stock Exchange but have their chief market over-the-counter. Other U.S. government securities, as well as state and municipal bonds, are traded over-the-counter exclusively. Institutional investors such as mutual funds often trade over-the-counter because they are given volume discounts not offered on the exchanges. The regulation of the over-the-counter market is carried out largely by the National Association of Securities Dealers, created by Congress in 1939 to establish rules of conduct and protect members and investors from abuses. See also NASDAQ.

For more information on over-the-counter market, visit Britannica.com.

 
Law Dictionary: Over-The-Counter Market [OTC]

A securities market created by dealers who primarily handle trading in securities that are not listed stocks on an organized exchange. OTC trading differs from exchange trading in two significant ways: (1) transactions are carried out through telephone contact and negotiation with a number of dealers, called market makers, as compared to the single specialist, single location auction market mechanism used for listed securities trading, and (2) the market maker acts as principal in the transaction which involves the dealer as buyer and seller from his own inventory. The bulk of bond trading is carried out in the OTC market. See National Association of Securities Dealers [NASD].

 
Wikipedia: over-the-counter (finance)

Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is the opposite of exchange trading which occurs on futures exchanges or stock exchanges.

OTC Contracts and Markets

An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. It is mostly done via the computer or the telephone. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement.

An over-the-counter market is a financial market where products are traded over-the-counter.

Drafting of OTC derivatives

OTC derivatives are documented under master agreements. A master agreement is a document agreed between two parties that sets out standard terms that apply to all the transactions entered into between those parties. Each time that a transaction is entered into, the terms of the master agreement do not need to be renegotiated and apply automatically.

OTC Traded Stocks

In the U.S., over-the-counter trading in stocks is carried out via market makers who use quotation services such as the OTC Bulletin Board (OTCBB) and the Pink Sheets. The US over-the-counter market is monitered by the NASD. Because such trades are not traded on any major stock exchange and there is less research done on them in the financial market, they are considered to be risky. As there is very infrequent trading in such a market, the spread (which is the difference between the bid price and ask price) is large.

OTC Market Statistics

Data provided by Pink Sheets

  • Securities Quoted Exclusively on Pink Sheets 5,019
  • Securities Dually Quoted on Pink Sheets and OTCBB 3,445
  • Securities Quoted Exclusively on OTCBB 130

Total 8,594

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Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved.  Read more
Accounting Dictionary. Dictionary of Accounting Terms. Copyright © 2005 by Barron's Educational Series, Inc. All rights reserved.  Read more
Britannica Concise Encyclopedia. Britannica Concise Encyclopedia. © 2006 Encyclopædia Britannica, Inc. All rights reserved.  Read more
Law Dictionary. Law Dictionary. Copyright © 2003 by Barron's Educational Series, Inc. All rights reserved.  Read more
Wikipedia. This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Over-the-counter (finance)".  Read more

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