OTC Trading Grows in Prominence, Supplanting Crypto Exchanges

OTC Trading Basics “Over-the-counter” refers to trading that takes place directly between customers and market makers rather than on formal exchanges. Market participants may choose OTC trading over traditional exchanges for a variety of reasons such as price stability, speed of execution, security, and privacy.Most notably, OTC trading enables customers to manage their risk more efficiently. In a typical exchange trade, a large transaction usually requires a multitude of smaller trades at many rates to be completed. The liquidity and volatility of the market at any given time both determine the number of trades required, as well as the dispersion of rates. These price fluctuations, commonly seen in cryptocurrency markets, can significantly add to the cost of the trade and be a detriment to the market participant.In an OTC trade, customers cover their exposure in one transaction, promoting efficiency and avoiding disruptive execution across exchanges. The transaction does not get publicly displayed on exchange order books, thereby also enabling higher levels of privacy.While OTC trading has long been a market staple in traditional finance, 2018 has marked its broad adoption in the cryptocurrency space. In addition to addressing institutional requirements, OTC liquidity may revolutionize the cryptocurrency space by expanding to provide institutional levels of pricing, liquidity, and high-touch service to many more market participants.Changing Demand Dynamics In cryptocurrency trading, OTC has been the domain of large traders and “whales” for some time. However, a number of factors are influencing the recent growth of OTC adoption in the cryptosphere. Mainstream cryptocurrency exchanges currently have notoriously large backlogs of unverified users, so OTC trading desks are stepping up to onboard mid-market customers with orders of $100,000 and above. This is coupled with difficulty in getting fiat funds in and out of exchange accounts and a more overarching trend of an ever-changing regulatory environment. As the regulatory environment becomes better defined, larger cryptocurrency participants will require the liquidity and risk management attributes of the OTC market. As cryptocurrencies begin to meet regulatory and security guidelines and challenges, they will be more equipped to compete within the framework of more traditional investments. Higher levels of demand at institutional levels require deeper and more consistent liquidity. More often than not, cryptocurrency exchanges will not be able to meet these liquidity requirements, which will give more momentum to the expanding OTC trading market.