Over-the-Counter (OTC) Market Depth Analysis: Why the OTC Market Has Become Another Choice for Investors

Why Do Investors Need to Understand the OTC Market?

When you look for a company with investment potential but find that it is not listed on mainstream exchanges, you face a common investment dilemma. This is precisely the core reason for the existence of the Over The Counter (OTC) market. Rather than being just a supplement to the market, OTC is a vast investment ecosystem—offering more diverse product options, more flexible trading methods, and relatively broader growth opportunities.

What Is the OTC Over-the-Counter Market?

Core Definition of the OTC Market

Over The Counter, in English, is called OTC, also known as “over-the-counter trading” or “desk trading.” Unlike centralized securities exchanges, the OTC market does not have a physical trading hall or a unified trading venue. Investors buy and sell securities through dispersed channels—banks, brokerages, telephone systems, or electronic platforms. This means that transaction prices are negotiated between buyers and sellers, rather than determined by a unified market bidding process.

Who Trades in the OTC Market?

Many companies choose to operate in the OTC market because they cannot meet the listing requirements of exchanges. These are usually small to medium-sized enterprises or startups that may lack sufficient capital scale, operational history, or are unwilling to bear strict disclosure obligations. However, some sufficiently large companies deliberately choose to stay in the OTC market to avoid the competitive pressure of disclosing sensitive business information publicly.

With the proliferation of the internet and the expansion of international financial markets, the OTC market has rapidly grown. Investors’ demand for trading convenience and market accessibility continues to rise, causing the OTC to evolve into a mature, multi-layered market ecosystem.

Types of Products Traded in the OTC Market

The diversity of products in the OTC market far exceeds that of on-exchange markets. Main categories include:

Stocks and Bonds
The OTC stock market is particularly large, covering unlisted small and medium-sized enterprise stocks. Bonds are more advantageous in the OTC market due to their large issuance volume and variety, though trading frequency is relatively low. This characteristic makes OTC an ideal venue for bond trading.

Derivatives and Contracts
Options, futures, spread contracts, and other derivatives are traded in the OTC market. These products can be highly customized according to the needs of both trading parties.

Foreign Exchange and Cryptocurrencies
International currency trading is inherently OTC. The cryptocurrency market is also similar; OTC allows investors to purchase large amounts of digital assets at once, which is often difficult to achieve in dedicated crypto markets.

How the OTC Market Operates in Taiwan

Market Structure

Taiwan’s stock market is divided into two tiers: the listed market (securities exchange) and the OTC market (OTC Trading Center). To balance regulation and innovation, the government established the OTC Trading Center, providing smaller but promising companies with a listing opportunity. Companies only need to be recommended by more than two brokerage firms to enter the Emerging Market; if they perform well within six months (such as improved profitability or better financial health), they can apply to transfer to the main or OTC market.

Trading Process and Rules

Investors place orders through brokerages to buy OTC stocks, following the same process as buying listed stocks. Brokerages then upload orders to the OTC Trading Center’s Automated Trading System (ATS), which matches trades based on price priority and time priority.

The OTC market follows the same trading rules as the listed market:

• Pre-market session: 08:30–09:00
• Normal trading hours: 09:00–13:30
• After-hours pricing: 13:40–14:30
• Every 5 seconds, a call auction occurs
• Price fluctuation limit: ±10% (same as listed)
• Settlement system: T+2 (settlement completed two working days after trade)

Significance of the OTC Index

The OTC index published by the OTC Trading Center (also called the OTC Index) is an important indicator reflecting the overall condition of Taiwan’s OTC stock market. Many investors observe the OTC index to gauge the trends of small and medium-sized stocks.

Because these companies are smaller, OTC-listed firms are more susceptible to news and market sentiment, resulting in higher volatility. However, this also provides more attractive themes and growth potential.

Core Differences Between OTC and On-Exchange Trading

There are fundamental differences across multiple dimensions:

Product Specifications
On-exchange trading features high standardization, with all products following uniform specifications. OTC trading is the opposite; products can be highly customized, with greater flexibility.

Trading Mode
On-exchange uses auction-based trading, which is transparent and allows all participants to see prices and have opportunities to transact. OTC trading is negotiation-based; buyers and sellers negotiate prices individually, and the same product may have different prices with different counterparties. This means that in OTC markets, informational advantage often outweighs capital size.

Main Products
On-exchange markets focus on standardized securities, futures, and other mass-market products. OTC markets cover a wide range of assets such as forex CFDs, cryptocurrencies, and unlisted stocks. Since on-exchange trading requires products to have certain market scale, the variety is limited; OTC markets, with relaxed requirements, are extremely diverse.

Regulatory Environment
Exchanges are approved and directly regulated by the government. OTC markets are operated by general brokerages with relatively lenient regulation; some OTC platforms are not under formal regulation, creating opportunities for fraud.

Trading Transparency
Exchanges are required to disclose all trading prices and volumes, ensuring full transparency. OTC markets lack mandatory disclosure, and trading details are often concealed, creating information asymmetry. Skilled investors can exploit this to earn excess returns, while uninformed investors may suffer significant losses.

Liquidity and Trading Volume
Exchanges have large trading volumes and high liquidity, making it easier for international funds to flow in. OTC markets have limited trading volume and lower liquidity; some assets may be difficult to sell quickly at desired prices.

Trading Methods and Leverage Flexibility
On-exchange trading is subject to strict risk controls; leverage and short-selling are heavily regulated. OTC markets offer more trading options, with more flexible leverage ratios, allowing investors to adjust strategies according to their risk tolerance.

Advantages of Investing in the OTC Market

✔ Wide Range of Investment Targets
OTC trading opens up hundreds of new investment opportunities, from derivatives to binary options, CFDs, and forex, far exceeding the scope of on-exchange markets.

✔ Flexible Trading Methods
Whether in terms of trading hours, product specifications, or trading structures, OTC markets provide high flexibility and customization.

✔ Greater Leverage Space
Traditional markets offer limited leverage multiples. OTC markets can provide various leverage options, enabling investors to amplify returns with higher leverage.

✔ Increasing Market Regulation
Modern OTC markets have established multiple safety mechanisms, approaching the standards of centralized markets. Many brokers are licensed and regulated by reputable financial institutions, enhancing trading safety and professionalism.

Risks and Challenges of OTC Markets

❌ Lack of Regulation
OTC markets lack unified rules and full transparency; laws and regulations are relatively lenient. Many companies and securities that do not meet on-exchange requirements can only trade OTC, attracting some fraudulent brokers.

❌ Liquidity Risk
OTC securities often lack liquidity, making it difficult for investors to cash out quickly at desired prices.

❌ Market Risk
Like any market, OTC trading is affected by market volatility. Most investors cannot access the same level of transparent information as in centralized exchanges, increasing decision-making difficulty.

❌ Counterparty Credit Risk
Due to diverse counterparties and loose regulation, investors face the risk that trading partners may default. Some assets are highly volatile and illiquid, further amplifying risks.

❌ Scam Risk
Fraudulent actors may use false information to lure investors or set up fake exchanges to conduct scams.

Is OTC Trading Safe?

OTC trading is not inherently unsafe; the key lies in how investors choose and respond.

Compared to centralized exchanges, OTC trading does carry higher risks. However, risks can be significantly reduced through proper strategies:

First, Carefully Select Brokers
Ensure the broker is safe and reliable. Qualified brokers should be under multiple layers of regulation, possess strong risk management capabilities, and offer investor protections such as risk assessments, KYC procedures, and complaint mechanisms.

Second, Choose Mature Products
Prioritize trading in large-volume, liquid, and well-established products (like forex). Understand their spreads, liquidity characteristics, and withdrawal policies thoroughly.

Third, Gather Information and Make Informed Decisions
Collect comprehensive market information, understand the fundamentals and technical aspects of trading products, and avoid blind investments.

Engaging in OTC trading through legitimate platforms with comprehensive risk management and investor protection systems is an important safeguard to reduce risks.

Conclusion: The Investment Value of the OTC Market

The OTC market offers investors opportunities and flexibility beyond traditional markets. For investors seeking diversification and growth-oriented opportunities, the OTC market is indeed worth paying attention to. However, flexibility comes with risks; investors must have sufficient knowledge, cautious risk assessment skills, and choose safe, reliable trading platforms to profit in the OTC market.

Remember: In OTC markets, knowledge and information are often more powerful than capital itself.