Exchange vs. Over-the-Counter Markets: Eternal War
Financial markets are complex environments with their own conjunctures and institutional structures. Historically, there are two basic ways to organize financial markets—exchange and over the counter (OTC). The cryptocurrency is no exception. Today we’ll focus on the latter, OTC market, which is now gaining momentum in the crypto world. What’s its nature? Over-the-counter trading is considered as one of the principal ways to trade crypto for those who want to buy or sell a large portion of digital assets. OTC trades are often placed by high-volume players – ‘crypto-whales’, such as hedge funds, private wealth managers and high-net-worth individuals. Despite the fact that OTC trading is not available for every crypto investor, the Bitcoin market here is roughly three times larger than the exchange one. As a rule, a minimum of $75,000 must be on the table before the discussion between parties can even begin. On average, the game for an institutional player in the OTC market usually starts in $50,000-and-up arena, depending on a company’s policy or individual’s preferences. Some centralized exchanges have already started offering OTC services. In summer, U.S. crypto exchange Bittrex launched an over-the-counter (OTC) trading desk. The new service allows approved clients to “quickly and conveniently trade assets”, and supports nearly 200 cryptocurrencies already offered by the exchange. One of the latest to join the ‘OTC wave’ is U.S.-based crypto exchange Coinbase which opened its over-the-counter (OTC) crypto trading desk in November, 2018. In his latest interview, the company’s Head of Sales Christine Sandler said why the firm had resorted to the OTC trading: “We launched our OTC business as a complement to our exchange business because we found a lot of institutions were using OTC as an on-ramp for crypto trading” Why ‘whales’ only? It’s no secret that the rich do things differently. That’s why they are the rich, though. Here ‘big boys’ could avoid excessive commission fees and, in a manner of speaking, feel more decentralized. When compared to exchanges, there transactions are completed through a centralized source. In simple terms, there’s a third party acting as the mediator between buyers and sellers. If you have some extra millions of dollars, it will be extremely inconvenient to place such an order via crypto exchange due to the hassle with continuous verifications and big commission fees. Plus, the order can move the entire market down and hence will make a negative impact on your fortune. Over-the-counter markets are generally decentralized and have no centralized trading facility. This promotes heavy competition between counterparties and lower transaction costs. Here, there are many mediators who compete to link buyers to sellers. The advantage is that such rivalry ensures that costs for intermediary services are as low as possible. The big crypto OTC providers are Cumberland, Jump, and Circle. But it’s hard to rank them because their transactions and earnings are necessarily kept private. OTC market is not entered unreasonably. One of the principle advantages of OTC trading is that clients can trade with each other via broker without anyone else knowing about their interacting. It’s like you are the only one in restaurant, and brokers are the waitresses who compete in order to serve you. The trendiest OTC instrument to have arrived on the scene is ICO investing. In most cases the ICO model allows investors to support their favorite projects and receive tokens directly without strict oversight from authorities. However, where there’s a profit to be made, big brother (regulator) will be watching. Since OTC trading provides the possibility of avoiding official records, the regulators started watching quite thoroughly. That’s why traders and brokers even in OTC market may also need to complete KYC and AML procedures on each other to make sure they satisfy legal requirements.