| Definition |
Trading of financial instruments directly between two parties without a centralized exchange. |
Trading of standardized contracts on a centralized regulated exchange. |
| Trading Venue |
Decentralized, negotiated directly between parties (banks, dealers, brokers). |
Centralized marketplaces like NYSE, NASDAQ, CME. |
| Standardization |
Contracts are customized and flexible to meet specific needs. |
Contracts are standardized with fixed terms and conditions. |
| Transparency |
Low transparency; prices and volumes often not publicly disclosed. |
High transparency with real-time prices and trade data. |
| Regulation |
Less regulated; subject to bilateral agreements and specific jurisdiction laws. |
Highly regulated by market authorities (e.g., SEC, SEBI). |
| Counterparty Risk |
Higher counterparty risk as trades are private and rely on party creditworthiness. |
Lower risk due to clearinghouse guarantee and margin requirements. |
| Liquidity |
Generally lower liquidity; depends on counterparty availability. |
Typically higher liquidity with many buyers and sellers. |
| Pricing |
Prices are negotiated and can vary between parties. |
Prices determined by supply and demand in an open market. |
| Settlement |
Settlement terms are flexible and agreed bilaterally. |
Settlement procedures are standardized and follow exchange rules. |
| Product Range |
Includes customized derivatives, bonds, currencies, swaps. |
Includes stocks, futures, options, ETFs, standardized derivatives. |
| Costs |
Often higher due to customization and negotiation costs. |
Lower due to standardization and competitive bidding. |
| Access |
Limited to institutional or sophisticated investors. |
Accessible to retail and institutional investors. |
| Risk Management |
Risk managed through credit checks and collateral agreements. |
Risk managed through exchange margining and clearinghouses. |
| Contract Size |
Variable contract sizes tailored to parties' needs. |
Fixed contract sizes standardized by the exchange. |
| Examples |
Currency swaps, customized options, forwards. |
Equities, standardized futures, options on exchanges. |
| Transparency of Rules |
Rules are private and negotiated case-by-case. |
Clear, public, and strictly enforced exchange rules. |
| Market Impact |
Limited market impact due to private nature. |
Significant market impact; prices influence broad market. |
| Flexibility |
Highly flexible terms and conditions. |
Less flexible; must conform to exchange standards. |
| Transparency of Counterparty |
Often unknown counterparty until trade completion. |
Counterparty is the exchange or clearinghouse, ensuring anonymity. |
| Market Size |
Large but fragmented market globally. |
Large centralized markets with high trading volumes. |
| Settlement Risk |
Higher settlement risk due to bilateral nature. |
Lower due to centralized clearing and settlement. |
Over-the-Counter (OTC) vs Exchange-Traded