Over-the-counter (OTC) crypto trading involves two parties negotiating a trade directly, bypassing a centralized exchange’s public order book. Its main appeal: large orders are executed without revealing intent, minimizing slippage and visible market impact.
How OTC Trading Works
The process typically starts with a Request for Quote (RFQ). The trader tells the OTC desk the asset, direction, and size. The desk then sources liquidity from its own inventory or from external liquidity providers and returns a firm quote. If accepted, the trade is confirmed. Another common workflow is an Indication of Interest (IOI), used to test the market without committing. For very large orders, desks may employ Time-Weighted Average Price (TWAP) or Percentage of Volume (POV) algorithms to spread execution across time, reducing timing risk.
Cost Structure: The Spread Is the Fee
Most OTC trades do not carry a separate visible fee. Instead, the cost is embedded in the bid-ask spread. A wider spread means a higher total cost. Spreads tend to widen when the asset is illiquid or the market is volatile. Traders should compare the all-in price across providers, not just the advertised zero fee.
Settlement and Key Risks
Settlement involves trade confirmation, instruction exchange, fund preparation, and final delivery. Main risks include: counterparty risk (the other party fails to deliver), settlement risk (one side pays first and the other does not confirm), price transparency risk (a single quote may not be competitive), and scam risk in informal peer-to-peer deals. Using a reputable OTC desk with standardized documentation helps mitigate these issues.
Who Uses OTC Trading?
Typical users are institutional investors (funds, asset managers), high-net-worth individuals, miners and validators who need to offload large block rewards, market makers, and corporate treasuries (e.g., firms holding Bitcoin on their balance sheets). For these players, placing a large order on a public exchange would trigger significant price slippage, making OTC the preferred channel.
Key Differences from Exchange Trading
On a public order book, a large order walks through multiple price levels, directly moving the market. In OTC, the desk aggregates liquidity from multiple sources and quotes a single price. Settlement terms are flexible (T+0, T+1, etc.). However, indirect market impact still exists: the desk may hedge the trade on an exchange immediately, effectively transferring the sell pressure to the public market. The claim that “OTC does not move price” is only relative.