The Over-The-Counter (OTC) markets are essentially spot markets and are localised for specific commodities. Almost all the trading that takes place in these markets is delivery based.
OTC trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is the opposite of exchange trading which occurs on futures exchanges or stock exchanges.
An over-the-counter contract is a bi-lateral contract, in which two parties agree on how a particular trade or agreement is to be settled in the future. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement.
An over-the-counter market is a financial market where products are traded over-the-counter.
The buyers as well as the sellers have their set of brokers who negotiate the prices for them. This can be illustrated with the help of the following example: A farmer, who produces castor, wishing to sell his produce would go to the local
mandi.
There he would contact his broker who would in turn contact the brokers representing the buyers. The buyers in this case would be wholesalers or refiners. In event of a deal taking place the goods and the money would be exchanged directly between the buyer and the seller.
Thus, it can be seen that this market is restricted to only those people who are directly involved with the commodity. In addition to the spot transactions,