Deep Dive into OTC Exchanges: Investment Opportunities and Risk Defense in the Over-the-Counter Market

Why Do OTC Exchanges Exist?

Can’t find a company’s stock on traditional stock exchanges? It might be time to get to know OTC exchanges. OTC, short for “Over The Counter,” refers to decentralized trading that occurs without a centralized exchange, instead conducted through brokers, banks, phone, or electronic systems. These markets are also known as “over-the-counter trading” or “OTC trading.”

Rather than being another world, OTC exchanges are a gateway for companies that do not meet listing requirements. Small and medium-sized enterprises, startups, or publicly listed companies seeking to avoid strict disclosure obligations may trade here. With the development of internet finance, the OTC market has rapidly expanded, becoming an important trading channel for investors worldwide.

How OTC Exchanges Operate

The core feature of OTC trading is: trade prices are directly negotiated between buyers and sellers. Unlike the uniform bidding in centralized markets, the same stock can be sold at different prices to different buyers. This flexibility offers opportunities but also entails risks.

For example, in Taiwan, the OTC exchange operates with relative transparency:

Step 1: Investors place orders through brokers.

Step 2: Orders are uploaded to the OTC’s automatic matching system (ATS), which pairs orders based on “price priority, time priority.”

Trading hours:

• Pre-market: 08:30–09:00
• Regular trading: 09:00–13:30
• After-hours pricing: 13:40–14:30
• Call auction cycle: every 5 seconds

Trading rules are similar to those of the main market, including ±10% price fluctuation limits, T+2 settlement, and price limit restrictions. This means the barriers to participating in OTC trading are relatively low, but smaller company sizes also mean their stock prices are more susceptible to news and market sentiment.

What Can Be Traded on OTC Exchanges?

The products available in OTC markets far exceed traditional expectations:

Stocks — Stocks of unlisted SMEs and startups are the main commodities, with lower liquidity than listed stocks but a wide variety.

Bonds — Due to large issuance volumes and diverse types, but infrequent trading, OTC markets are more suitable for bond trading.

Derivatives — Options, futures, spread contracts, and other complex financial instruments find a flexible environment here.

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

Crypto — Popular crypto assets can be purchased in bulk on OTC markets, which is difficult to achieve on dedicated crypto exchanges.

OTC vs On-Exchange Trading: Key Differences

Key Analysis:

On-exchange markets emphasize “standardization,” which ensures transparency and fairness but limits profit margins. OTC exchanges lack uniform standards; buyers and sellers negotiate prices directly, making information advantage more important than capital advantage.

Regarding regulation, on-exchange markets are government-approved and fully regulated; OTC exchanges are operated by brokers and vary in oversight depending on region and institution. This is why investors must choose their trading venues carefully.

Investment Advantages of OTC Exchanges

✔️ Wide Range of Options — Derivatives, binary options, contracts for difference (CFDs), foreign exchange, and more diversify investment strategies.

✔️ High Trading Flexibility — Product specifications and trading methods can be tailored to investment goals, unconstrained by uniform rules.

✔️ Leverage Opportunities — Traditional markets have limited leverage, but OTC exchanges offer various leverage options to amplify potential gains.

✔️ Lower Entry Barriers — Less stringent qualification requirements for traders; with the right broker and products, safety can be assured.

Core Risks of OTC Exchanges

❌ Regulatory Gaps — OTC markets lack unified regulations, with looser legal oversight, making them susceptible to fraud by unscrupulous brokers. Many companies that do not meet listing criteria trade here, with transparency levels far below listed companies.

❌ Liquidity Shortage — Small trading volumes may prevent transactions at desired prices, leading to “no market” situations when selling.

❌ Credit Risk — Both parties face the risk of counterparty default, especially in unregulated OTC environments.

❌ Market Volatility — Due to small company sizes and concentrated holdings, stock prices are easily driven by news, with volatility much higher than mainboard markets.

❌ Scam Traps — Malicious actors may set up fake exchanges or spread false information to lure investors into high-risk trades.

Is OTC Trading Really Safe?

The answer is: It depends on your choices.

Lack of regulation does not inherently mean OTC trading is unsafe; the key lies in your selected broker and products. Legitimate OTC platforms should:

• Be authorized and regulated by international financial authorities
• Have strong risk management capabilities
• Offer investor protection measures (such as risk assessments, KYC verification, complaint mechanisms)
• Publicly disclose trading spreads, liquidity, and other vital info

Investor Self-Protection Checklist:

First, verify whether the broker is properly regulated. Second, choose mature and relatively liquid products. Third, fully understand spreads, fees, withdrawal policies, and other trading details. Lastly, cooperate with the platform on risk assessments and identity verification—these are safeguards, not obstacles.

Overview of the OTC Market in Taiwan

Taiwan’s stock market is divided into the “Stock Exchange” and the “OTC Market” (also called the OTC index or OTC Composite Index), which reflects the overall condition of small and medium-sized stocks and serves as an important indicator of OTC market trends.

This dual-track system aims to balance: strict listing requirements ensure quality on the main board, while looser OTC conditions allow startups room to grow. Companies with at least two supporting brokers can enter the OTC market; if their performance improves significantly within six months, they can even apply for listing.

However, lowering entry barriers also introduces risks. Many dubious companies are mixed in, and some unscrupulous brokers promote high-risk targets for profit. That’s why choosing reputable brokers is crucial.

How to Invest Rationally in OTC Markets

1. Choose brokers carefully — verify regulation, risk control, and market reputation.
2. Start with mature products — Forex and mainstream cryptocurrencies tend to have better liquidity.
3. Fully understand products — research spreads, volatility, historical trends before entering.
4. Control risk exposure — use reasonable leverage, set stop-loss and take-profit points.
5. Keep learning — OTC trading demands strong knowledge and psychological resilience.

OTC exchanges are not a monster to fear, but neither are they risk-free. They are markets of opportunity and challenge, suitable for investors with some experience and risk awareness to explore.