Over the counter (OTC)

A market structure, not a class of product. On an exchange, a standardised contract meets a central order book and a clearing house steps between the two sides. Over the counter, the contract is an agreement between two named parties on terms they set, and no third institution stands in the middle. Spot foreign exchange, forwards, most bond dealing and every retail contract for difference are dealt this way, which makes it by far the larger of the two structures by value.

Four consequences follow directly. Size is negotiable rather than confined to standard contract multiples. Most retail contracts are not cleared, so the firm remains the counterparty for the whole life of the contract and its own standing does the work a clearing house would otherwise do. There is no secondary market, so a contract can only be closed with the firm that wrote it. And there is no consolidated tape, so no single printed price exists for the market as a whole and two firms can honestly show different quotes at the same instant.

The word unregulated is the error, and it is a serious one. The contract is not listed, but the firm on the other side of it is licensed, and is bound by the conduct, capital, disclosure and client money rules of the regulator that licensed it. What over the counter actually changes is where the protection comes from: from a supervised firm and its segregation arrangements, rather than from a clearing house standing between the parties. That is why the questions that matter are which entity is named on the terms and which regulator supervises it.