What does the term 'over-the-counter market' refer to?

The term 'over-the-counter market' refers to a decentralized market where trading occurs directly between parties. This type of market facilitates transactions without the need for a centralized exchange or an intermediary to execute trades. In the over-the-counter (OTC) setting, buyers and sellers negotiate terms directly, which allows for greater flexibility in trade arrangements, such as price, quantity, and settlement conditions.

The nature of the OTC market contrasts with centralized exchanges where trading is conducted through a structured platform, facilitating a more efficient transaction process but with less negotiation on terms. The OTC market is particularly prevalent for certain types of securities, derivatives, and various financial instruments that may not meet the listing requirements of formal exchanges. This market structure allows for a wider range of products to be traded and can cater to the specific needs of market participants.

Understanding this concept is crucial, as it highlights how various trading environments function and underscores the importance of the flexibility offered by the OTC market, in contrast to more regulated and structured platforms.