The Best OTC Market Brokers

The Best OTC Market Brokers. First of all we would like to start this post by offering a general idea of what an OTC Broker is, its role, its trading scheme…

What is an OTC Market Broker?

OTC (over the counter) refers to the process of trading financial commodities carried out by OTC market brokers who trade over-the-counter via a broker-dealer network, negotiating directly with each other, as opposed to on an exchange. These intermediaries trade all OTC products, including commodities that are not listed on an exchange, such as stocks, debt securities, derivatives, financial instruments and foreign exchange IRS (interest rate swaps).

Commodities and OTC

Commodities that trade via OTC are typically smaller companies that cannot meet exchange listing requirements. This means that brokers are crucial in the OTC market and tend to dominate it as commodities are brokered in a manner that is not transparent nor has a fixed price, unlike on a transparent electronic platform or exchange.

The Role of an OTC market broker

The role of an OTC market broker consists of primarily finding the best trades and providing a point of contact for clients seeking to buy or sell financial or non-financial products over-the-counter. Although brokers are completely independent player in the over-the-counter (OTC) markets, regulatory restraints require them to act solely as an intermediary, taking no positions nor risks in the financial markets. Fundamentally, these brokers are the most common trading service providers as they provide continual contact with leading clients in the financial sphere (banks, insurance companies, large private companies, etc.) and therefore they govern the trade deals over the counter between two parties and without the supervision of exchange.

Usual Schedule of an OTC Trade or Deal

1. Investor selects an OTC market broker.
2. After examining a company’s public information, trade data, company news and its financials, the investor has to make an investment decision to give to the OTC market broker.
3. The investor outlines their order to the OTC market broker, whether it is a limit order (buy or sell an asset at below or above a specific price) or a market order (buy or sell an asset at whatever the best available price in the market is).
4. The OTC market broker reports, clears and eventually settles the trade and confirms the trade with the investor.

Who are the most successful and known OTC Market Brokers?

According to the Interdealer Broker Rankings 2019, the most successful OTC Market Brokers in the UK are:

• Icap (part of the NEX Group, owned by TP ICAP who also own Tullett Prebon, Moab, Axiom, PVM, COEX and Mirexa Capital) operates as an intermediary in wholesale financial markets. Many of its clients are commercial and investment banks. It operates in eight product areas: Volatility, Rates, Credit, Treasury, Non-Banking, Energy, Equities and Property. Additionally, the company trades in a number of OTC commodities including interest rates, credit, credit derivatives, foreign exchange, interest rate swaps, intellectual property (patents, via ICAP Patent Brokerage), and equity derivatives.
• Tullett Prebon (part of TP ICAP, but both companies exist and compete against each other).
• BGC (also own GFI Group, MINT, RP Martin, Sunrise Brokers, Cantor Fitzgerald) offer their customers access to more than 200 financial products including fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commercial real estate, commodities, futures, and structured products.
• Tradition (who also own Gottex Brokers and Maeten) is the interdealer broking arm of Compagnie Financière Tradition (CFT) and one of the world’s largest interdealer brokers in over-the-counter financial and commodity-related products.

In the USA, OTC market brokers are all part of the OTC Market Group which is separated into:

• OTC QX – the market with the most stringent listing requirement.
• OTC QB – venture market.
• OTC Pink – the lowest and most speculative of the three markets.

However, within the main OTC Markets Group, the most successful brokers are:

• FIDELITY INVESTMENTS
• TD AMERITRADE
• CHARLES SCHWAB
• INTERACTIVE BROKERS
• E*TRADE

How to find the best brokers for OTC platforms?

There are important criteria to consider when trying to find a suitable OTC market broker to hire:

• Fees
  • The best way to avoid paying excessively high fees for an OTC market broker is to shop around the market by calling multiple brokers on the phone and asking for their transaction costs and broker fees, therefore you can go with the cheapest option and avoid paying extra unnecessary fees.
• Quality of Customer Support
  • When investing in the OTC Market, the broker does not have the protection of an exchange, therefore a client has to fully trust the expertise and skill of their broker. So, an OTC Market broker needs to have a good understanding of the client’s investment needs and objectives and must be fully aware of the customers’ financial conditions before making any deals. This is because OTC contracts can be a lot more complicated than exchange trading and so, excellent customer support is essential.
• Expert Knowledge of the Financial Markets
  • There is less transparency and regulation in the OTC market and trading itself is decentralized so a client requires a broker who knows exactly what they’re doing. Brokers can offer clients a way to save time, effort and money whilst providing essential advice in trading and money management.
• Obligation of Disclosure
  • Brokers must conduct their business in a manner that reflects honour and integrity, therefore they must be truthful in their dealings to their client and disclose their investment decisions. Additionally, OTC market brokers may not trade without permission of the client nor exclusively trade to increase their commission. With fewer regulations on the OTC market, there is more risk of private client information becoming accessible to the public, so brokers need to be aware of the importance of client confidentiality.