OTC Over-the-Counter Trading Depth Analysis: What is the OTC Market, How It Works, and Investment Risks Explained

Understanding the OTC Market: The Necessity of Over-the-Counter Trading

In the current global financial markets, not all transactions occur within formal securities exchanges. OTC market (Over The Counter), also known as over-the-counter trading, refers to transactions conducted through decentralized channels, including banks, brokerages, telephone systems, and electronic platforms, rather than on centralized exchanges. This method of trading is also called “over-the-counter” or “off-exchange trading.”

The existence of OTC trading stems from the strict listing requirements established by traditional exchanges. Many small and medium-sized enterprises, startups, or certain financial products find it difficult to meet listing standards, yet they still require financing and trading channels. With the development of internet technology, the OTC market has rapidly expanded, becoming one of the main trading avenues for investors worldwide.

Types of Products Traded in the OTC Market

OTC trading covers a wide range of investment products, far beyond the scope of traditional exchanges:

Stocks: Besides stocks of companies that meet listing criteria, the OTC market particularly accommodates stocks of small and medium-sized enterprises and startups that do not qualify for listing, often with high growth potential.

Bonds: Due to their large issuance volume, diverse types, and infrequent trading, bonds are more suitable for OTC trading, which offers greater flexibility.

Derivatives: Options, futures, Contracts for Difference (CFDs), and other complex financial instruments are mainly traded through the OTC market.

Foreign Exchange and Cryptocurrencies: Various currency transactions and mainstream cryptocurrencies are actively traded in OTC markets. The advantage of OTC is the ability to execute large one-time purchases, which are difficult to achieve on professional crypto exchanges.

How the Taiwan OTC Market Operates

Taiwan’s stock market is divided into two tiers: the “Stock Exchange” and the “OTC Securities Exchange” (GTSM). The OTC index (GTSM index) compiled by the GTSM reflects the status of Taiwan’s OTC stock market, allowing many investors to observe the performance of small and medium-sized stocks.

The government established the GTSM to lower the barriers for companies to list. Companies only need recommendations from more than two brokerages to register; if their performance improves within six months (such as turning profitable or significantly strengthening their financial health), they can apply to transfer to the main or OTC market. This system aims to support the development of promising but smaller enterprises.

However, relaxed application conditions also bring risks. Some unscrupulous companies may enter the OTC market, and certain dishonest brokerages might recommend high-risk targets for profit. Therefore, choosing reputable brokers is crucial before entering the OTC market.

OTC Stock Trading Hours and Rules

The operation process of Taiwan’s OTC market is similar to that of the listing market. Investors place orders through brokerages, which are uploaded to the GTSM’s automated matching system (ATS), where trades are matched based on the principles of “price priority, time priority.”

Trading hours:

• Pre-market: 08:30–09:00
• Regular trading: 09:00–13:30
• After-hours pricing: 13:40–14:30

Trading features:

• Continuous auction every 5 seconds
• Price fluctuation limit of ±10% (same as the main market)
• Has a matching mechanism
• T+2 settlement system (settlement completed two business days after the trade)

Since OTC companies are required to comply with information disclosure regulations (quarterly reports, annual reports, and major news), their transparency is higher than that of the Emerging Stock Market. Overall, the OTC market mainly consists of small and medium-sized, growth-oriented companies, with higher volatility but more attractive themes and growth potential.

OTC Over-the-Counter Trading vs. On-Exchange Trading: Key Differences

Product Specification Differences

Products traded on exchanges have standardized specifications, similar to bank gold trading with set standards; OTC market transactions are more like pawnshops, with each trade being unique. However, the diversity of OTC products also offers advantages—trading varieties are far richer than on exchanges.

Trading Modes and Information Advantages

Exchange trading employs auction methods, characterized by transparency and fairness, but profit margins are limited. OTC trading involves bilateral negotiations, where the same product can be sold at different prices to different buyers. In this environment, information is more important than capital—investors with better market information tend to profit more.

Regulation and Platform Importance

Exchange trading is approved and regulated by the government, with comprehensive oversight. OTC markets are operated by individual brokerages, with only some under formal regulation. This introduces risks such as fraud or the operation of fake trading platforms. Investors must choose regulated and government-approved trading platforms to ensure safety.

Transparency and Information Asymmetry

Exchanges disclose all transaction prices and volumes, whereas OTC markets do not have such mandatory disclosures. Due to information asymmetry, experienced investors can earn excess returns, while less knowledgeable investors may face significant losses.

Liquidity and Trading Methods

The on-exchange market has higher liquidity due to strict regulation and attraction of international capital. It enforces risk controls, limits leverage, and short-selling. OTC markets are more flexible, allowing investors to adopt various trading strategies.

Advantages of OTC Over-the-Counter Trading

✔️ Broader Investment Options: OTC markets offer many more investment forms than on-exchange markets, including derivatives, binary options, CFDs, forex trading, etc., catering to different investment strategies.

✔️ Flexible Trading Methods: Product specifications and trading methods are more adaptable, allowing customized arrangements based on individual investment goals.

✔️ Diverse Leverage Options: Traditional markets have leverage restrictions, whereas OTC markets provide multiple leverage choices, enabling investors to amplify gains with higher leverage.

✔️ Gradually Improving Security: Modern OTC markets have optimized operations and established multi-layered security mechanisms similar to centralized markets. Many brokerages are authorized and regulated by reputable financial institutions, providing a more secure trading environment.

Risks and Challenges of OTC Over-the-Counter Trading

❌ Regulatory Gaps and Risks: OTC markets lack unified regulations and transparency, with relatively loose legal oversight, leading to risks of fraud by unscrupulous brokers. In contrast, listed companies and securities on exchanges must comply with strict regulations; many non-compliant companies can only operate in OTC markets.

❌ Liquidity Concerns: OTC securities generally have lower liquidity than exchange-traded securities, making it difficult to obtain favorable prices, especially in low-volume or volatile markets.

❌ Market Volatility Risks: Although similar to stock market risks, OTC investors often lack access to the transparent information provided by exchanges, increasing decision-making difficulty.

❌ Counterparty Credit Risk: Without regulatory oversight, there is a risk of counterparty default or fraud.

Is OTC Over-the-Counter Trading Safe?

The answer is relative. Compared to centralized exchange trading, OTC trading indeed carries risks. Since the market lacks unified rules, buyers and sellers negotiate prices, and the same product may be offered at different prices to different buyers. Additionally, there are malicious actors who use false information to deceive investors.

However, OTC trading is not entirely unsafe. The key to safety lies in choosing legitimate brokerages. A secure trading platform should be regulated at various levels and have strong risk management capabilities. Investors should also select mature trading products and thoroughly understand details such as spreads and liquidity.

Reputable OTC platforms typically have investor protection measures, including risk assessments, KYC procedures, complaint mechanisms, etc., which help reduce trading risks. With proper knowledge, investors can participate in OTC trading with relative confidence.

Summary: Suitable Investors for the OTC Market

The OTC market opens the door for investors seeking more opportunities and willing to accept corresponding risks. In short, OTC is a trading ecosystem that offers more choices and higher flexibility but also requires investors to have stronger risk awareness. Whether you want to invest in small and mid-cap growth stocks or engage in complex derivatives trading, you can find suitable opportunities in the OTC market—provided you choose reputable, regulated platforms and establish comprehensive risk management systems.