What is a defining characteristic of the Over-The-Counter market?

The defining characteristic of the Over-The-Counter (OTC) market is that it facilitates direct trading between participants. This markets transactions occur outside of formal exchanges, allowing for a more flexible trading system where participants can negotiate terms directly. The OTC market is known for its wide variety of securities, including stocks, bonds, derivatives, and currencies that may not be listed on traditional exchanges.

This direct trading mechanism allows for more personalized trading arrangements, but it also comes with lower transparency compared to formal exchanges. The approach is particularly advantageous for trading securities that might not have enough volume to be effectively traded on established exchanges, catering to a diverse range of participants including individual investors, institutional traders, and market makers.

While there may be some electronic systems involved in the OTC process, it is not limited to them, distinguishing it from markets that are strictly electronic. Additionally, the SEC does not require the same level of reporting for all OTC transactions as it does for those conducted on formal exchanges, further emphasizing the less regulated nature of the OTC market compared to more structured environments.