What does 'over-the-counter' (OTC) trading refer to?

Over-the-counter (OTC) trading refers to the process of trading securities directly between two parties without the involvement of a formal exchange. This type of trading allows for greater flexibility in terms of price negotiation and can involve a wide variety of financial instruments, including stocks, bonds, and derivatives. OTC trading is facilitated by broker-dealers who act as intermediaries to help match buyers and sellers.

The nature of OTC trading is particularly important as it enables transactions that may not meet the listing requirements of an exchange or involve less liquid securities. It is a common practice for securities that are not listed on major exchanges, allowing for a wider range of investment opportunities and market participation.

In contrast, trading through a formal exchange is characterized by standardized contracts and stricter regulatory oversight. The other options inaccurately describe the nature of OTC trading, as they focus on formal exchange trading, size limitations, or specific types of market participants, which do not encompass the direct and flexible nature of OTC transactions.