Forex: OTC Explained

Currency Trading or Forex and the forex market are widely popular; one of the most popular types of investment with millions of traders participating in forex markets every day (24hours/5days/week). The forex market is big and has two levels of markets, the OTC and Interbank. In this article, we will discuss the OTC market, but before we do, what is Forex Trading? Forex Trading is where you can buy and sell currencies at their exchange rate. On paper, forex trading is fairly easy to understand which is one reason why there are millions of participants worldwide. For some people, forex is where they put their investment money, while for some, forex trading is their everyday activity. With forex trading, you can earn 3x, 5x, 10x, 20x, or 50x the amount you make on your actual job.

Forex: OTC Explained

• Forex Market

The forex market has the largest volume and liquidity, with an annual global transaction value surpassing $6 trillion. Propelled by largely untapped trends in technology, innovation, and consumerism, the forex market steadily grew in size and complexity since its inception nearly 20 years ago. Though it is known primarily for providing settlement services for online transactions, it has grown into a sophisticated ecosystem with underlying activities including investment, development, management consulting, distribution, and gaming.

• Over-the-Counter (OTC)

What is Over-the-Counter (OTC) Forex? It is a level of currency trading that is traded over the counter without central coordination. It is usually administered by a licensed broker-dealer who maintains a stable market value through constant communication with clients and maintaining a strong reputation in the industry. This means OTC forex deals have a counterparty, which can either be a buyer or a seller. Buyers and sellers may be banks or broker-dealers who deal in cash. Examples of banks that deal in OTC forex include Charles Schwab, TD Bank Group, Bank of Baroda, Bank of Montreal, and Wells Fargo & Co.

• Counterparty Risk

In Forex, counterparty risk is experienced by many traders. So, what is it? Counterparty risk arises when one party in a transaction either does not fulfill its obligations towards the other party or breaches internal rules established by the exchange.

• How OTC Works

What does OTC Forex involve? If you are looking to purchase or sell foreign currencies, then an OTC broker is your best and easiest bet. OTC is short for over-the-counter, meaning that the exchange is allowed to exist without needing regulatory approval. There are many different kinds of OTC brokers out there, each with its own reason for being a broker. However, because legal compliance is always a top priority for any company that wishes to do business in financial markets, these firms tend to concentrate on specific services that will help them earn commissions for helping people buy and sell foreign currencies.

Key Takeaway

OTC Market is a big market, so understanding how it works and how you should trade in OTC will significantly increase your chances of becoming a successful Forex Trader.