We often hear about OTC (Over The Counter) transactions but what exactly are they? This type of operation does not leave public traces or alter the market price (spot). They are usually used by institutions for large volume purchases and sales. In OTC transactions, terms are negotiated bilaterally between two counterparties. The minimum purchase is variable. The deal between the two parties is private and the OTC takes place out of the public eye, resulting in a transaction invisible to the market.
The key to understanding OTC trading is that they are mutually beneficial. In not very "liquid" markets, large volume buying or selling would generate 2 things:
-Large increases (if it is a buy) or decreases (if it is a sale) in prices resulting in market disruption
-Large losses of money, since when you buy or sell large sums on the market, not being able to close everything with a single transaction, you increase or decrease the price of the subsequent orders you want to execute. As you execute huge buy orders, the price increases. Similarly, if you sell large quantities, the price decreases
DEPTH CHART AND SLIPPAGE
OTC trades are not illegal – they just benefit from increased liquidity and reduced slippage. In addition to price levels, the key parameter controlling slippage is the depth chart which considers order size and volumes at each price level.
The deeper the market, the less likely it is that large trades will significantly affect the price of an asset. The more buy and sell orders there are, the greater the depth of that market (therefore the lower the slippage), provided that the distribution of these is fairly uniform at the various price levels (lots of liquidity and non-uniform buy/sell orders do not mean low slippage).
If there is a large depth in that market there will be sufficient volume of pending orders on both the supply and demand sides to prevent a large order from moving the price significantly. An asset with strong market depth will usually have high volume and will be fairly liquid, allowing traders to place large orders without significantly impacting the market price. Those with little depth undergo large variations for huge orders (an order is divided into several orders).
OTC: NO SLIPPAGE
Any lack of depth and liquidity can be avoided through OTC transactions where money is saved by agreeing on a mutually advantageous price, which does not necessarily have to correspond to the market price. There may be live quotes, different from the "official" price. This generates a win-win scenario for both parties. The market will not experience price changes, also leaving your intentions to enter or exit hidden. Furthermore, with a trusted intermediary (escrow) between the counterparties, it is not necessary for them to reveal their identity to each other, since the intermediary is the only one who knows both parties. As mentioned, if you tried to buy 1 billion dollars in BTC, using a traditional exchange only the first million euros would be bought at the current price at that moment. The rest of the orders (target that has been set) would be less and less profitable (the same number of Satoshis would cost more and more). You yourself are increasing the price of the Bitcoins you want to buy. On the other hand, if someone wanted to sell $1 billion worth of Bitcoin, he would drive down the price of each BTC, making a smaller profit for each. This is due to the liquidity present on the exchange which would not allow the execution of orders of that size. Basically these transactions are off chain and this avoids slippage. On Chain OTCs can be used to liquidate a whale and prevent congestion of a network (due to the high number of transactions and this huge liquidation). Another reason is privacy, as the EU is planning a more comprehensive regulation by marking all transactions over €1,000 from/to "non-custodial wallets". In the United States, all transactions over $10,000 involving cash must be reported separately to the Internal Revenue Service (IRS), regardless of whether an individual or financial institution is receiving the cash.
While only a minority of OTC transactions involve physical cash, this $10,000 line, similar to the EU's proposed €1,000 limit, also marks the upper limit after which financial institutions in the US must report electronic money transfers.
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