Why most bond trading is done over-the-counter? (2024)

Why most bond trading is done over-the-counter?

This is because bonds come from several different issuers, and each issuer will have several bonds offered - with different maturity, coupon, nominal value, and credit rating.

What is an OTC bond?

Over-the-counter (OTC) securities are securities that are not listed on a major exchange in the United States and are instead traded via a broker-dealer network, usually because many are smaller companies and do not meet the requirements to be listed on a national exchange.

What are some features of the OTC market for bonds?

What are some features of the OTC market for bonds? The OTC has no designated physical location. It is the price at which an investor can buy a particular security from a dealer. It is the price at which a dealer is willing to sell a particular security.

What is the difference between over-the-counter and exchange traded?

Exchange regulated markets are centralized. Here, a single party mediates and thereby connects buyers with the sellers. All the transactions are therefore completed through a centralized source. On the other hand, Over the Counter trading is completely de-centralized.

How does OTC trading work?

In an OTC market, dealers act as market-makers by quoting prices at which they will buy and sell a security, currency, or other financial products. A trade can be executed between two participants in an OTC market without others being aware of the price at which the transaction was completed.

What is the main purpose of trading OTC securities for most investors?

The Bottom Line

The over-the-counter (OTC) market helps investors trade securities via a broker-dealer network instead of on a centralized exchange like the New York Stock Exchange. Although OTC networks are not formal exchanges, they still have eligibility requirements determined by the SEC.

Is the bond market an OTC market?

Bonds of the U.S. government (“treasuries”), as well as many other bond issues and preferred-stock issues, are listed on the New York Stock Exchange but have their chief market over-the-counter.

What are the advantages of the OTC market?

What is a key characteristic of OTC derivatives?

Key Takeaways

OTC derivatives do not have standardized terms and they are not listed on an asset exchange. As an example, a forward and a futures contract both can represent the same underlying, but the former is OTC while the latter is exchange-traded.

What are the features of OTC options?

In OTC options, there is no exchange or clearinghouse involved between the buyer and seller, and so they are free to set strike prices and expirations based on mutually agreed terms. When options are traded through exchanges, there might be certain limitations or regulations on how the strike price is calculated.

Why OTC is better than exchange?

While exchanges provide transparency and liquidity, OTC trading offers privacy and flexibility, especially for large transactions. Investors should evaluate their needs and understand the nuances of each method to make informed trading decisions.

Is it good to trade in OTC?

OTC trading offers greater flexibility and lower transaction costs, but comes with higher counterparty risk, lower liquidity, and less regulation. It can be appealing to traders who value privacy and access to unique instruments. However, it requires careful consideration of counterparty risk and creditworthiness.

What is the opposite of OTC trading?

The opposite of OTC trading is exchange trading, which takes place via a centralised exchange.

How do OTC trades settle?

Almost all OTC derivatives transactions are executed by telephone. Once a trade is executed, it is confirmed and settled bilaterally by the counterparties. The primary purpose of issuing confirmations is to ensure that the counterparties agree on the economic terms of the trade.

What is the limit for OTC trading?

Yes – the following requirements apply to OTC Trading: Minimum Trading Limit: each quote and trade is subject to the Minimum Trading Limit of 50,000USDC or its equivalent for retail users; 100,000USDC or its equivalent for institutional users (including US institutional users)

Why bonds are traded in OTC market?

Liquidity gives investors ample opportunity to buy and sell bonds before maturity at fair prices. Along this liquidity, corporate bonds traded OTC provide investors with a steady stream of income and security because they are rated based on the credit history of the issuing firm.

Why are OTC money market derivatives mostly cleared?

Derivatives transactions may hedge but they also generate risks. Specifically, they expose users to market risk, liquidity risk, and counterparty credit risk. The key function of a CCP that clears a derivative transaction between two banks is to manage the counterparty credit risk.

Why was the OTC created?

The Office of the Treaty Commissioner (OTC) was first created in 1989 to assist in resolving issues surrounding Treaty Land Entitlement.

Are bond futures traded OTC?

Exchange-traded bond futures are traded on regulated exchanges and offer transparency, liquidity, and reduced counterparty risk. On the other hand, OTC bond futures are traded directly between parties, allowing for more flexibility in contract terms but posing higher counterparty risk.

How do bond traders make money?

How do bond traders make money? By buying bonds when interest rates are high and selling when they are low. By accurately predicting macroeconomic trends and Central Bank moves.

Why do people trade bonds?

Investors trade bonds for a number of reasons, with the key two being—profit and protection. Investors can profit by trading bonds to pick up yield (trading up to a higher-yielding bond) or benefit from a credit upgrade (bond price increases following an upgrade).

Why do people use OTC?

OTC drugs have various medical uses and effects, treating mild pain to motion sickness. Some abuse OTC drugs to self-medicate for mental illnesses like anxiety and depression. Abusing these medications can also give users a euphoric “high” or hallucinations.

What are the advantages and disadvantages of the OTC market?

The advantages of OTC markets include low costs, especially when selling new issues, more freedom, and direct electronic transactions. The disadvantages of OTC markets include more risk exposure and a high bid price to ask price spread.

What are the disadvantages of the OTC market?

Who regulates OTC derivatives?

The SEC enforces federal securities laws that cover transactions in “securities” as defined by law, including some OTC derivatives such as securities options.