While traditional, legacy stock exchanges currently set market standards through stringent trade regulations and limitations, all trading was once done direct. But since the enforcement of trade standardizations made through the NYSE, LSE, and other formal exchanges, the direct transaction method that pioneered many innovative financial instruments is now an alternative known as over-the-counter (OTC), or off-exchange trading.
OTC refers to a direct form of private trading that maintains many of the same benefits for asset classes enabled in traditional exchange, but isn’t regulated by all the same laws governing exchanges. OTC trades are based upon mutual consent between two parties, and offer a high level of flexibility through tailored agreements not feasible in a traditional market.
OTC derivatives are a versatile alternative for agile businesses utilizing all asset classes, and the growing popularity of cryptocurrency and independent investment has created an even greater opportunity for leveraging OTC potential. Traditional exchange methods hold a greater risk of hacking as well as the potential for slippage in a market not equipped with sufficient liquidity. In this era of digital finance, OTC derivatives provide a necessary alternative to traditional stock trading for all types of businesses.
While exchanges made outside stock market governance laws do present some risk, traders aiming to truly innovate in their businesses can no longer rely solely on an exchange infrastructure that wasn’t designed for trading emerging asset classes.
Here’s why we need a secure OTC market to sustain the digital economy.
Companies must adhere to strict listing guidelines in order to trade on major stock exchanges, many of which exclude small or newer companies with huge growth potential. The OTC market enables these businesses to participate without meeting listing requirements, providing the foundation for thousands of lucrative small and micro-capitalization deals.
A significant number of crucial financial instruments are only offered in the OTC market. With the largest being the global foreign exchange market, and other derivative instruments such as interest rate swaps, asset backed securities (ABS) and forwards are only traded in a non-exchange setting. OTC trading is the only way for participants to access these kinds of non-standardized financial instruments that fit their business needs.
Traditional exchanges typically place per day trade and withdrawal caps on accounts that limit trader opportunities. OTC derivatives can allow for more freedom in execution through the direct nature of deals made between traders and liquidity providers, as well as through faster trading times enabled by sufficient liquidity.
Ambitious companies trading in crypto and other forms of currency are still finding their footing in exchange markets not designed for large scale trade execution. Trading a large order will eat into the exchange’s order book, causing an impact on the market leading to unfavourable price execution, or slippage.
Cryptocurrency trades are highly slippage prone, and can end up divided between several more expensive orders as a result of the lack of liquidity legacy infrastructures currently offer. The OTC market avoids these pitfalls and offers better deals for traders by providing a single price per buy order.
With the many freedoms it enables and a range of offerings exceeding that of traditional exchange, OTC market provides an unrestricted alternative ripe for opportunity. But while its lack of constraints is one of its many advantages, a widely unchecked OTC market does come with some risks for trading participants. In order to maintain the health of the OTC market, NUTS provides the transparency needed for secure transactions through the use of a highly accessible distributed ledger that keeps all traders protected and accountable.
Building with NUTS
To keep buyers and sellers protected and accountable in the open OTC market, NUTS provides an accessible, distributed ledger that secures non-standardized trading and provides the transparency needed to safeguard every transaction.
NUTS is focused on simplifying building decentralized financial applications. Our approach is to integrate essential financial capabilities into smart contracts to create diversified technology modules. Our vision is to enable an open, inclusive and transparent financial market.