## Over-the-Counter (OTC) Market Complete Guide: Understanding Market Structure and Investment Opportunities

( What is the OTC market?

Not all investment targets can be traded on formal exchanges. When you are optimistic about a company but cannot find it on major exchanges, over-the-counter (OTC, full name Over The Counter) trading becomes another option.

Simply put, the OTC market is a way for investors to bypass centralized exchanges and conduct securities transactions through decentralized channels (banks, brokerages, phone, electronic systems, etc.). These transactions are also known as "over-the-counter trading," "OTC trading," or "pink sheets market."

Unlike centralized markets, OTC trading prices are not determined by a unified exchange but are negotiated directly between buyers and sellers. The counterparties can be more diverse—possibly banks, securities firms, corporations, or individual investors.

**Why do companies choose to trade on the OTC market?** Many small and medium-sized enterprises or startups that do not meet listing qualifications can only trade OTC; some companies that do qualify for listing prefer OTC to avoid the strict information disclosure requirements that bring competitive pressure.

With the development of the internet, the OTC market has rapidly expanded. Traders operate under relatively relaxed rules and regulations, offering more flexible and customizable products, which attracts more investors seeking convenience and accessibility.

) OTC Market Main Trading Products

The OTC market covers a broader range of investment targets than on-exchange trading:

**Stocks** — Besides listed stocks, OTC mainly trades unlisted stocks of small and medium-sized companies or startups, providing investment opportunities not available on exchanges.

**Bonds** — Due to large issuance volumes, diverse types, but infrequent trading, bonds tend to be more liquid OTC than on exchanges.

**Financial Derivatives** — Options, futures, CFDs, and other contracts are also traded OTC.

**Foreign Exchange** — Currency trading on various platforms falls under OTC trading.

**Cryptocurrencies** — Major cryptocurrencies can be traded in large amounts OTC, which is often difficult to achieve on professional crypto exchanges.

### OTC Market Operation Mechanism

Taking Taiwan as an example, the OTC market operates similarly to the listed market, with differences mainly in company size and listing standards. The overall process includes:

**Step 1: Investors place orders through brokerages**

Buying or selling OTC stocks follows the same procedures as trading listed stocks, with no additional complex steps.

**Step 2: Orders enter the matching system**

Brokerages upload orders to the OTC's automated trading system (ATS), which matches trades based on "price priority, time priority." The technical process is synchronized with the listed market, requiring no special operations or additional features.

**OTC Market Trading Rules and Schedule**

| Session | Time |
|---------|--------|
| Pre-market | 08:30–09:00 |
| Normal trading | 09:00–13:30 |
| Post-market pricing | 13:40–14:30 |

The rules are identical to the listed market: continuous auction every 5 seconds, ±10% price fluctuation limits, matching mechanisms, and clear daily trading hours.

Settlement follows T+2, completing within two working days after the transaction. Listed companies must comply with information disclosure regulations (quarterly reports, annual reports, major news, etc.), making OTC markets more transparent than unregulated markets.

Overall, OTC markets mainly consist of small and growth-oriented companies, with higher volatility but also more thematic and growth potential. Due to better liquidity than unregulated OTC markets and consistent制度 design with the listed market, retail investors face relatively low barriers to entry. However, since listed companies tend to be smaller, they are more susceptible to news and market sentiment, so caution is advised regarding price fluctuations.

### OTC Market vs. On-Exchange Trading: Seven Key Differences

On-exchange trading is regulated by the government, while OTC is a relatively decentralized trading method. They differ significantly in several aspects:

| Aspect | On-Exchange Trading (Centralized Market) | OTC Off-Exchange Trading |
|---------|----------------------------------------|-------------------------|
| **Product Standards** | Standardized | Non-standardized |
| **Trading Mode** | Continuous auction | Negotiated trading |
| **Trading Venue** | Centralized exchange | No centralized venue, dispersed |
| **Main Products** | Standard securities, bonds, futures, funds | Derivatives, forex, unlisted stocks, bonds |
| **Regulation** | Strict government and regulatory oversight | Relatively relaxed regulation |
| **Trading Transparency** | Public prices and volumes | Not necessarily public |
| **Liquidity** | High | Low |

**① Differences in Product Standards**

On-exchange products are standardized—like gold bars at a bank, where specifications are uniform. OTC products are non-standardized—like pawnshop goods, where conditions vary. Pawnshops can trade a wider variety of goods, which banks cannot provide.

**② Differences in Trading Mode**

On-exchange uses continuous auction (public, transparent, relatively fair but with limited profit margins), while OTC employs negotiated trading (buyers and sellers negotiate directly, with no public restrictions, and information is more valuable than capital).

**③ Main Product Choices**

On-exchange mainly involves scaled securities and futures, whereas OTC includes forex, cryptocurrencies, unlisted stocks, bonds, and more diverse products. The need for standardization limits product variety on exchanges; OTC is highly diverse.

**④ Platforms and Regulatory Bodies**

Exchanges are approved and regulated by the government. OTC markets are operated by brokerages with varying degrees of regulation. Some unscrupulous actors set up fake exchanges to scam investors. Investors should choose platforms approved and regulated by the government to protect their rights.

**⑤ Transparency Gap**

Exchanges are required to disclose prices and volumes, but OTC markets are not. This information gap creates opportunities and risks—experienced traders can earn excess returns, while uninformed investors may suffer losses.

**⑥ Liquidity Impact**

Exchanges have high trading volume and liquidity due to proper regulation and no geographical restrictions, attracting international capital. OTC trading volume is lower, with less liquidity, making it harder to execute trades at desired prices.

**⑦ Trading Flexibility**

Exchanges have limited trading methods (strict risk controls, limited leverage and short-selling). OTC markets offer more trading options and higher leverage, enabling more flexible strategies.

### Advantages of OTC Off-Exchange Trading

✓ **More Investment Options** — Access to derivatives, CFDs, forex, and other traditional markets not available elsewhere.

✓ **High Trading Flexibility** — Trading methods and product specifications can be customized according to investment goals, without fixed constraints.

✓ **Rich Leverage Options** — Compared to low leverage limits in traditional markets, OTC offers various leverage choices to amplify gains.

✓ **Gradually Improving Security Measures** — Legitimate OTC platforms have implemented multiple security layers, similar to centralized markets. Some brokers are authorized by reputable financial institutions, making them more professional and reliable.

### Risks and Challenges of OTC Off-Exchange Trading

❌ **Lack of Unified Regulation** — OTC markets lack unified rules, with low transparency and relatively loose legal oversight, providing opportunities for fraudulent brokers. Listed companies must follow strict regulations, while many non-compliant companies can only trade OTC.

❌ **Liquidity Risk** — OTC securities tend to have low liquidity, making it difficult to execute trades at desired prices.

❌ **Market Volatility Risk** — OTC investors do not have access to transparent information like exchange traders, making them more vulnerable to market swings and sudden news.

❌ **Counterparty Credit Risk** — Without central exchange oversight and guarantees, counterparties may default or breach contracts.

❌ **Fraud Risk** — There are malicious actors who use false information to deceive investors.

### Is OTC Off-Exchange Trading Safe?

While OTC markets lack exchange regulation, this does not mean they are completely unsafe—just that risks are higher than on exchanges.

OTC markets have no unified rules; buyers and sellers negotiate directly. Sellers may offer the same asset at different prices to different buyers, exposing investors to counterparty credit risk, large price swings, and low liquidity.

**How can investors ensure trading safety?** The key points are:

**1. Choose regulated brokers** — Ensure brokers are under multiple layers of regulation with strong risk controls.

**2. Prioritize mature products** — Select well-understood, highly liquid instruments like forex with clear spreads.

**3. Seek platform protections** — Legitimate platforms should offer risk assessments, KYC procedures, complaint mechanisms, and investor protections to reduce risks.

### Taiwan’s OTC Market’s Unique Position

Taiwan’s stock market is divided into the "Stock Exchange" and the "OTC Trading Center." The OTC index (also called the OTC Composite Index) reflects the state of Taiwan’s off-exchange stock market, and many investors observe it to gauge the performance of small and medium-sized stocks.

This layered design aims to ensure companies meet certain size standards, but overly strict regulations can hinder development—many promising startups cannot start projects due to lack of funding.

To address this, the government established the OTC Trading Center, relaxing listing requirements—companies can list with just two or more sponsoring brokerages. If a company shows improvement within six months (profitability or operational health), it can apply to transfer to the main or OTC markets.

This relatively lenient system has helped genuine promising companies but also attracted less reputable firms. Some unscrupulous brokerages recommend high-risk targets to harvest quick profits—these are called "pink sheets" stocks, which carry very high risks. Therefore, investors should carefully select targets and find reputable brokers for trading.

### Summary: Core Recommendations for OTC Market Investment

The OTC market offers opportunities that cannot be covered by on-exchange trading. The growth potential of small and startup companies, diverse trading products, and flexible trading methods are the main attractions.

However, risks such as loose regulation, low transparency, limited liquidity, and fraud must be seriously considered.

To succeed in OTC investing, key points include: choosing regulated and reputable trading platforms, understanding the characteristics of traded products, assessing personal risk tolerance, and continuously enhancing market knowledge. Proper preparation is essential to profit from OTC opportunities while avoiding potential risks.