Over-the-counter trading

The off-exchange trading (also direct trade , telephone trading or OTC trading ) referred to finance the trade between market participants who do not have the stock exchange or other trading platforms is handled.

General

The term telephone trading is still in use today, even if trading is mainly carried out through electronic trading systems . The abbreviation "OTC" means, (over the counter ' English over the counter ). OTC trading takes place between credit institutions and actors in the non-banking sector and in interbank trading between credit institutions.

to form

There are three types of direct trading:

Off-exchange trading in listed securities . This includes trading in the pre- and post-exchange . These transactions are processed as OTC transactions even if the market participants involved do not want to make the transaction public. This is happening to a rapidly increasing extent and in high trading volumes in dark pools .

Off-exchange trading in financial derivatives without standardized specifications (e.g. exotic options , OTC options).

Off-exchange trading in securities that are not admitted to stock exchange trading.

Exchanges only offer standardized products which, however, often do not meet the hedging requirements of the trading partners. For example, if a company wants to hedge the interest rate risk of an investment , it will only find a suitable instrument on the stock exchanges in exceptional cases. For some of the products traded on the financial market, OTC trading is therefore more important than stock exchange trading, e.g. B. Certificates .

Through online brokers and private investors have the opportunity to directly do business with a issuers carry out or broker. The investor sends a request to his online broker about the price of the specified financial product via the Internet . The issuer then communicates the binding purchase and sales price for the specified quantity. The investor then has to decide within a few seconds whether he wants to conclude this transaction on these terms or not.

Advantages and disadvantages

advantages

Saving the exchange fees that would be due when trading on the exchange
Individual modification of the traded product
Speed through direct trade between both trading partners
The bid-ask spread offers attractive margins, especially for investment banks, especially for complex products
High flexibility enables rapid product innovations

disadvantage

Less control and oversight
Possibly missing reference markets
Only partial options for specifying limit orders (only relevant for private investors)
No way to view an order book , so there is only a low level of market transparency
Partly less liquidity than with stock exchange trading
Counterparty risk arises , but this can be limited through netting agreements and collateral as well as clearing via central counterparties (particularly relevant for OTC derivatives).

Sales volume

Exchange-linked derivatives trading is said to have increased approximately fivefold between 1990 and 2002, with a slight decline in some areas during the financial crisis of 2007–2009 . The volume of outstanding OTC derivatives in the area of interest rate and currency contracts increased by a factor of around 120 between 1990 and 2009. In addition, credit derivatives have also grown in importance over the past 15 years. The size of the OTC derivatives market is $ 450 trillion.

Organized “over-the-counter” trading platforms

There are organized securities markets outside of the traditional stock exchanges, which are also counted as OTC trading and describe themselves as "off-exchange". According to the definition of the term stock exchange , these organized markets are also stock exchanges , so the term “off-exchange” is contradictory here. The largest OTC platform in Switzerland is operated by the Berner Kantonalbank . Further platforms are provided by Zürcher Kantonalbank , the private bank Lienhardt & Partner and the securities trading company Bondpartners .

OTC trading in the electricity market

On the electricity market in addition to trading on the existing electricity exchange a large OTC market, in particular by the conventional players in the energy industry is used. Both short-term deals on the spot market and long-term deals on the futures market are initiated and concluded on it. If a company wishes to participate in the OTC electricity market, a balancing group contract must be concluded, since every transaction not only results in a balance sheet transaction, but also in actual physical flow of electricity . Forward contracts with a physical obligation to perform are predominantly traded on the OTC electricity market.

In contrast to open exchange trading, the traded prices and volumes are only known to market participants. Since there are hardly any regulatory requirements other than the requirements of the German Civil Code and so-called " good morals ", OTC trading is susceptible to manipulation. The European Commission would like to counteract this through the Federal Network Agency on the energy market with the so-called REMIT specifications, which are intended to ensure more transparency and security in the electricity market.

Relevance of OTC trading for renewable energies

Due to its origins in traditional electricity trading, OTC trading is particularly interesting for large power plants that secure prices and purchase their electricity volumes through long-term OTC contracts. The renewable energies , through their involvement in the direct marketing and the market premium model already relative price certainty - but only as long as the funding for the plant is running. After the end of the funding period, usually 20 years, OTC trading could also become more attractive for renewable energies as a long-term safeguard for electricity purchases and prices.

G20 requirements and European legislation since 2007

Derivatives trading in Europe is regulated by the European Union . On the occasion of the financial crisis , in which the regulatory authorities reacted insufficiently to upheavals in OTC trading, the EU institutions made new legislative proposals. The first statements by the European Commission explicitly referred to the resolutions of the G20 summits in Pittsburgh (2009) and Toronto (2010). In Pittsburgh it was demanded: “All standardized OTC derivatives should be traded on stock exchanges or electronic trading platforms and settled through a central counterparty by the end of 2012 at the latest. OTC derivative contracts should be reported to trade repositories. For contracts that are not centrally cleared, higher capital requirements should apply. ”In September 2010, the European Commission proposed a regulation on derivatives trading. This is currently being negotiated between the Council of the European Union and the European Parliament . EP rapporteur is Werner Langen .

While the majority in the European Parliament welcomes the Commission's proposal, the Green Group does not go far enough with regulation. For example, the European Securities and Markets Authority (ESMA) should be given more powers and derivatives trading should be restricted in principle.

Individual evidence

^ Christian Schoder / Sybille Pirklbauer: The political, economic and social imbalances from thirty years of neoliberal financial markets. In: Beate Blaschek (Ed.): Crash instead of cash. OGB Verlag, Vienna 2008, ISBN 978-3-7035-1348-0 , p. 15.
^ Bank for International Settlements: Statistics on exchange traded derivatives. 2009.
↑ ISDA.org: ISDA Market Survey. 2009 ( Memento from September 30, 2010 in the Internet Archive ) (PDF file; 10 kB).
↑ de.reuters.com: US senators cannot agree on derivatives regulation. March 20, 2010.
↑ From the lover's share to the burden. Retrieved March 28, 2020 .
↑ REMIT - REMIT information portal of the Federal Network Agency. Retrieved November 29, 2017 .
↑ Next Kraftwerke: What is OTC trading? November 20, 2017, accessed on November 29, 2017 (German).
↑ European Commission : Proposal for a regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories (PDF), accessed on April 8, 2011 . COM (2010) 484 final, 15 September 2010.
↑ See the exception confirms the regulation: "EP reporters in dialogue" on the OTC regulation. European Movement Germany , April 11, 2011, accessed on April 11, 2011 .
↑ Derivatives trading - transparency instead of "Wild West" ( Memento from October 24, 2010 in the Internet Archive )

[1] Christian Schoder / Sybille Pirklbauer: The political, economic and social imbalances from thirty years of neoliberal financial markets. In: Beate Blaschek (Ed.): Crash instead of cash. OGB Verlag, Vienna 2008, ISBN 978-3-7035-1348-0 , p. 15.

[2] Bank for International Settlements: Statistics on exchange traded derivatives. 2009.

[3] ISDA.org: ISDA Market Survey. 2009 ( Memento from September 30, 2010 in the Internet Archive ) (PDF file; 10 kB).

[4] .reuters.com: US senators cannot agree on derivatives regulation. March 20, 2010.

[5] From the lover's share to the burden. Retrieved March 28, 2020 .

[6] REMIT - REMIT information portal of the Federal Network Agency. Retrieved November 29, 2017 .

[7] Next Kraftwerke: What is OTC trading? November 20, 2017, accessed on November 29, 2017 (German).

[8] European Commission : Proposal for a regulation of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories (PDF), accessed on April 8, 2011 . COM (2010) 484 final, 15 September 2010.

[9] See the exception confirms the regulation: "EP reporters in dialogue" on the OTC regulation. European Movement Germany , April 11, 2011, accessed on April 11, 2011 .

[10] Derivatives trading - transparency instead of "Wild West" ( Memento from October 24, 2010 in the Internet Archive )