The OTC market is where trades happen directly between two parties — no exchange in the middle. Unlike NYSE or BSE where orders match on a centralized platform, OTC trading is done through dealer networks, phone calls, or electronic platforms. It is more flexible but less transparent.
OTC markets trade: bonds (most bonds trade OTC, not on exchanges), derivatives (interest rate swaps, CDSs), foreign exchange ($7.5 trillion daily), and smaller stocks not listed on major exchanges. The OTC derivatives market alone has a notional value exceeding $600 trillion.
OTC stocks (penny stocks) trade on systems like OTC Markets Group (formerly Pink Sheets) in the US. These companies do not meet listing requirements of NYSE or NASDAQ — making them riskier. The 2008 crisis exposed the danger of unregulated OTC derivatives — credit default swaps traded OTC nearly collapsed the global financial system. Post-crisis regulations now require many OTC derivatives to be cleared through central counterparties.