Definition of OTC
OTC stands for Over-the-Counter. The term is used to describe a format of trading securities. An OTC transaction is when the buyer and seller transact with each other directly, independent from a venue or marketplace such as an exchange. Forex is considered an OTC market as there is no single, central exchange for foreign currencies. The foreign exchange market has many participants trading on many different exchanges and directly with one another. It’s all done without the use of a central exchange matching the buyers or sellers. When you exchange foreign currency, either at the airport, at a local bank branch or with an online forex broker, this is an Over-the-Counter transaction.
A good example of a central exchange would be the New York Stock Exchange. Exchange-traded products can even be bought and sold Over-the-Counter. For example, if your broker has 500 shares of Facebook on their books and you decide you want to buy 100, your broker will simply sell 100 Facebook shares to you Over-the-Counter, as you did not go to the exchange to buy them.