How does crypto OTC actually work?

JC jawe.sol
8 min readFeb 11, 2020

Over-the-counter (OTC) trading desks like Circle Trade play an essential role in the crypto industry but few people understand why they’re important, how they work, and what separates one from another. As part of our mission to provide you with key market insights, we at Circle Research put together an in-depth look at the relevance, structure and taxonomy of crypto trading desks.

Similar to their counterparts in traditional finance, crypto OTC desks deal in immense volumes with seeming opacity, outside the periphery of the public eye. In this article, we’ll aim to bring clarity to how crypto OTC actually works.

What are OTC markets?

There are two basic ways of organizing financial markets — exchange and “over the counter”, or OTC.

Exchanges such as the New York Stock Exchange or a crypto-equivalent like Poloniex essentially act as mediators between buyers and sellers. Traders post prices they are willing to sell assets for (asks) and others post prices they are willing to buy assets for (bids). When a bid and an ask overlap, the exchange facilitates the trade. All trades happen out in the open and the prices that different assets trade for are what you see scrolling across the bottom of CNBC or on a website like CoinMarketCap.

Exchange

OTC differs in that trade happens directly between two parties, with one of those parties typically being a “desk” — a business dedicated to the buying and selling of a particular asset class. In an OTC trade, two parties agree on a price and then work out the transfer of assets between themselves. This direct medium of exchange is the precise reason such opacity exists within OTC markets — no one beyond the parties involved is privy to the price and volume in which various assets are trading at “over the counter.”

OTC

In traditional markets, more US companies’ shares trade OTC (about 10,000) than on the Nasdaq and NYSE combined. Trillions of dollars in bonds, commodities, currencies, derivatives such as the infamous mortgage backed securities influential during the 2008 financial crisis, and scores of other complex financial instruments trade OTC each year. The derivative OTC markets alone account for $600+ trillion in notional value every year.

In short, OTC markets are where the majority of trade within the global financial system takes place.

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