3 Features of the OTC Market for Bonds

An over-the-counter (OTC) market is where products are traded via a broker-dealer network instead of a centralized exchange. In fact, companies that do not meet the requirements to be listed on standard market exchanges may still have their products traded OTC.

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1. Decentralized Trading

An OTC market for bonds is technically a decentralized market where products, like bonds, securities, and currencies, are not traded on centralized stock markets.

The decentralized nature of bond trading allows for more flexibility in some ways:

• Diverse trading venues
• Specific customization to meet investment objectives
• Flexibility in liquidity management
• Price negotiation and competition in pricing
• Capital allocation
• Wider accessibility
• Market adaptation, allowing participants to adapt their trading strategies

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2. Diverse Bond Offerings

OTC trading offers a wide range of bonds, stocks, and derivatives. Bonds are particularly abundant in OTC markets due to their diversity in maturities, yields, and qualities.

3. Risks

As mentioned above, OTC markets are generally risky due to lenient reporting requirements. There is also lower price transparency associated with bonds traded OTC, and they tend to have higher volatility.

In the bond market, the ease with which bond prices are determined and the process of trading can vary significantly. This difference is often associated with whether a bond is considered to have readily available prices or if it requires negotiation.