Over-the-counter trading – why is it needed and where is it possible?

Off-the-counter trading is a special type of trading that allows you to buy and sell exchange assets outside of standard market hours. Traditionally, stock exchanges are open during specific hours, but as technology has developed and investor needs have changed, trading has become possible after the official opening hours of the stock exchange. Thanks to the development of electronic trading systems, as ECN (Electronic Communication Network), investors can buy and sell assets even late in the evening or early in the morning outside of trading sessions.

In this article, we will discuss the basics of how off-session trading works, what its benefits are, what risks are involved, and what a practical approach to investing outside of standard trading hours looks like.

How does over-the-counter trading work?

OTC trading is not uniform and varies across exchanges. For example, on US exchanges such as NYSE or NASDAQ, investors have access to trading before the start of the standard session (so-called premarket) and after its completion (after-hours).Typical hours for OTC trading are: from 4:00 to 9:30 in the morning and from 16: 00 20 to: 00 Eastern Time (ET). On the Warsaw Stock Exchange, standard over-the-counter trading is not available, both for individual and institutional investors (although with small exceptions, however, irrelevant from the perspective of this article).

Off-the-counter trading is mainly conducted through electronic systems that allow investors to place trades directly without the need to use a traditional trading floor. ECN Platforms, such as Instinet or NYSE Arca, allow buyers and sellers to connect in real time. Transactions are executed based on submitted orders, and the price of the instrument depends on supply and demand at that moment. Due to liquidity and fewer investors participating in OTC trading, it can be characterized by a bit more volatility.

Why do investors use off-market trading?

OTC trading attracts investors who want to react to the latest information, which is often released after the market closes. Examples include quarterly reports, political announcements, interest rate changes, and other important economic events. Institutional investors often participate in OTC trading, but individual investors are also increasingly using this option.

For some investors, OTC trading is convenient for other reasons as well. It may suit investors who are unable to attend trading sessions during standard trading hours, for example for professional or personal reasons. Because OTC trading is more flexible, it becomes a convenient alternative, especially in the era of globalization, where investors from different time zones have access to markets all over the world.

READ: Forex Trading Hours – Find Your Way Around Time Zones

Advantages and disadvantages of over-the-counter trading

OTC trading has its significant advantages and disadvantages, which can be an opportunity for us but also create a certain risk for our investments. Here are the most important ones.

Advantages:

• Availability during non-standard hours: One of the major advantages of off-day trading is that investors can trade with more flexibility and over a longer trading window.
• Reaction to important information: After the regular session ends, key information is often released (e.g., company financial results) that can cause significant price movements. Thanks to off-session trading, investors can react to these changes more quickly.
• The ability to benefit from greater price volatility: Off-session trading, especially right after important news is released, can yield large profits if a trader correctly anticipates price movements.

Disadvantages:

• – Less liquidity: Fewer active traders mean it is harder to get your order filled at your preferred price, and the spread between bid and ask prices can be much wider (although this point applies more to institutional investors)
• – Greater price fluctuations: Because there are fewer market participants, stock prices may fluctuate more than during a regular trading session, which increases risk for less experienced investors.
• – No access to all information: Off-the-counter trading is often the domain of professional and institutional investors who may have better information than individual investors.

Choosing the Right Broker for OTC Trading

Over-the-counter trading can be an interesting option for individual investors, but it requires access to advanced tools and platforms offering high-quality technical support. Before starting to trade outside standard session hours, it is worth choosing a proven brokerage platform that not only allows you to place orders during non-standard hours, but also provides stability and access to ECN (Electronic Communication Network). Brokers such as Saxo Bank, Charles Schwab and Interactive Brokers meet these criteria and offer access to OTC trading on the US and European markets. Here's what you need to know about their offer:

Saxo Bank

Saxo Bank is a Danish broker with a global reach that specializes in offering advanced investment solutions for both individual and institutional investors. It offers access to a wide range of financial instruments, including shares, CFDs, forex, ETFs and many others.

• Access to OTC trading: Saxo Bank offers off-session trading on the US market, allowing traders to react to market movements outside of standard trading hours.
• Advanced tools: Saxo Bank operates the SaxoTraderGO platform, which gives users access to extensive analytical tools, charts, price alerts and market reports.
• Technical assistance: The broker provides technical support and substantive support in the use of the platform, which is especially important in off-session trading, which differs from traditional trading.

Charles Schwab

Charles Schwab is one of the most well-known brokers in the US, serving both individual and institutional clients. The broker provides access to numerous investment tools and gives the opportunity to invest in global markets.

• Pre-market and post-market trading: Charles Schwab offers access to pre-market and after-hours trading on the US stock markets, giving investors the opportunity to trade before and after regular trading hours.
• StreetSmart Edge® Platform: Schwab offers an advanced trading platform, StreetSmart Edge®, that allows you to analyze and monitor markets, set limit orders, and set price alerts, giving investors complete control over their trades.
• Technical support and education: Charles Schwab provides technical support as well as educational resources that are useful for investors who want to better understand the specifics of over-the-counter trading.

Interactive Brokers

Interactive Brokers is a popular broker with a global reach, which offers some of the lowest transaction fees and access to advanced investment platforms. It is especially valued among investors who actively trade on various international markets.

• Trading outside of trading hours: Interactive Brokers offers off-the-counter trading on a range of instruments, including US stocks and futures, giving investors greater flexibility.
• Trader Workstation (TWS) Platform: It is one of the most advanced platforms that offers access to real-time market data, advanced analytical tools, and a wide range of financial instruments. TWS also supports automated trading, which is useful for trading outside standard hours.
• Technical assistance: Interactive Brokers provides 24/7 technical support.

What to consider when choosing a broker for OTC trading?

If you would like to look for an OTC broker yourself, here are some tips to consider when choosing one:

• ECN availability: ECN enables direct connection of traders and is the foundation of over-the-counter trading, providing flexibility and greater trading opportunities.
• Platform stability: Over-the-counter trading can be technically riskier, so it’s worth making sure your broker offers a reliable, proven platform.
• Technical support and access to market data: Off-session trading can be dynamic and unpredictable, so access to up-to-date market data and support in the event of technical issues is crucial.
• Transaction costs and spreads: OTC trading often comes with larger spreads. Before choosing a broker, it is worth checking the fee structures and average spreads during OTC trading.

Summary

OTC trading is an interesting option for some groups of investors. For individual investors planning to trade OTC, choosing a broker is crucial. It is worth choosing a platform that provides access to ECN, technical support, and tools for order control and market analysis. Brokers such as Saxo Bank, Charles Schwab, and Interactive Brokers offer solid support for OTC trading in the US and European markets and can be good choices for investors looking to increase the flexibility of their trading.