New participants in the digital asset space need to familiarize themselves with the basic actors, actions, risks and potential opportunities that the industry offers. Learning about liquidity in centralized and decentralized exchanges is just as important as learning how to secure your funds – either via a trusted exchange or private keys.
After incorporating this basic knowledge, the next step involves gaining a deeper understanding of how the rest of the elements in the ecosystem work. Let’s take some time to dive into one of these parts – OTC trading.
What is OTC trading
Over-The-Counter (OTC) trading operations are those that are not registered or carried out in any formal exchange.
We previously introduced the concept of order-books for centralized exchanges – where the orders of every user are bundled together into a massive ledger, which connects identical transactions from different sides of a trade (buying and selling). Liquidity provided through market making along with retail orders can be found in this ledger. There are, however, some types of orders that due to their nature cannot be executed normally through these – relatively shallow – order books without significantly altering price and liquidity. Enter OTC desks.
OTC transactions are those carried out between two parties without the intervention of an exchange. Because both parties don’t have to abide by exchange rules (such as rice settlement), the terms for the transaction can be different from that of an exchange, with different settlement volumes and prices, resulting in a bilateral contract.
On traditional financial markets, OTC transactions mainly refer to those involving public though unlisted stocks, penny stocks, and many other asset types – including derivatives such as options, forwards, and futures. In the digital asset industry, the menu is smaller.
There are many estimates comparing the OTC market to its spot counterpart – the typical exchange trading venue. In 2018, the TABB group estimated that the OTC market amounted to 2-3 times that of the spot market . More recent studies propose OTC activity ranging from U$S 50-70 bn/month to $US 20bn+ per day.
Digital assets OTC trading
As introduced above, digital asset OTC trading is limited to fewer markets; spot, futures and options take the largest portion of it. Nonetheless, they present both advantages similar to its traditional finance counterpart, as well as some new benefits.
Advantages of OTC trading
Advantages of digital asset OTC trading include:
- Minimal price slippage. Because the predetermined price is unique and does not depend on both sides of the exchange order book, the price slippage – the difference between expected and actual price – is minimal. Additionally, OTC trades enjoy a limited lock-in price period.
- Anonymity & confidentiality. OTC desks enable some anonymity and confidentiality features, thereby helping large traders maintain their intentions hidden from the public.
- Higher pair availability. For some lesser-known cryptocurrencies, OTC allows for higher volume transactions than they would find on a public exchange.
- No trading limits. While typical digital asset exchanges limit the amount of daily volume traded -in USD terms-, OTC desks don’t set these limits, and enable big transactions.
- Trader verifiability. Through platform KYC, fraud is virtually eliminated. Traders post their wallets to showcase they are in possession of the necessary funds to take on the transaction. One can also count on live information of recent deals, in order to minimize variability. Finally, there is insurance available.
SCALABLE offers interactions with a number of participants within our liquidity solution, as well as the possibility for clients to integrate them. Besides the typical brokers, instant exchanges, traders, order routers, ML specialists, and market makers, participants include OTC desks. Given this diverse mix of participants, high-quality market microstructure can be set up in the digital asset space, thus ensuring a strong and effective order flow.
“How Does OTC Crypto Trading Actually Work?” Nasdaq, www.nasdaq.com/articles/how-does-otc-crypto-trading-actually-work-2021-05-17.
 “Crypto Trading: Platforms Target Institutional Market.” TABB Group, 5 Apr. 2018, research.tabbgroup.com/report/v16-013-crypto-trading-platforms-target-institutional-market/.
 “How Crypto OTC Trading Works: Insights From Top Liquidity Providers.” OKEx, 25 June 2020, www.okex.com/academy/en/how-crypto-otc-trading-works-insights-from-top-liquidity-providers.