The Financial market consists of complex instruments that are traded on two different platforms. They are the exchanges and Over-the-counters (OTC). Both of these platforms operate differently. Below are the highlights of two different markets.
An Exchange is a place to trade stocks and other securities either physically or through online. Generally called as “Stock exchange”, these are the first regularized platform introduced for trading financial instruments. There will be a mediator in an exchange to connect buyers and sellers. Exchanges are a centralized system that set rules and regulations to govern the trading. They are closely connected to clearing facilities through which post-trade activities are taken care. Below are the characteristics of Exchanges
- Transaction to trade listed securities, currencies, and derivatives.
- A Centralized system with uniform control, rules, and regulations
- Trading through intermediary at a particular platform i.e. brokers
- Elimination of counterparty risk
- Uniformed price of security since all the trades flows through one central place
- Permitted only for exchange members.
- Offers greater regulatory oversight
Examples of exchange include the New York Stock Exchange, NASDAQ, London Stock Exchange, Japan Exchange Group, Bombay Stock Exchange, National Stock Exchange of India etc.
- Over-the-counter (OTC)
OTC market is a decentralized market mainly enabled for trading non-listed securities. Unlike exchanges, there is never a “place” for OTC. These markets although well organized are informal mainly ruled by the dealers/brokers. Dealers act as market makers and determine the price of the securities. They have the flexibility to quote any price. Generally, trade in this platform happens between two direct parties without any intermediary i.e either dealer to dealer or dealer to the customer. Following are the characteristics of OTC
- No centralized exchange.
- Less transparent compared to the exchange
- Heavy competition between sellers for gaining high trade volume
- Lower transaction cost as compared to exchanges
- Lack of price regulation resulting in different pricing for particular security
- Trades are closed between the parties by mere telephonic communication, online platforms, e-mails etc
- Higher counterparty risk since the market is decentralized.
Since the markets are decentralized in this system, traders may be unfamiliar with the actual price of the product. This led to the creation of trading software/robots that track the price of the product in other exchanges, foresee the future price, analyze the best period to trade etc. There are many trading bots such as Crypto Code that offers a wide variety of features to trade effectively resulting in a magnificent return to the users.