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Lesson 5 of 8 · 11 min
Off-exchange and over-the-counter equity trading
Very large, very small or illiquid trades often execute off-exchange to limit implicit costs such as market impact, while OTC equity trading runs through a network of dealer market makers that offers reliable execution but less transparency.
In short
- Off-exchange trades are typically block trades (usually 10,000 shares or more), tiny retail trades in low-priced shares, or trades in illiquid shares.
- Brokers split blocks into smaller orders over time or across several parties to reduce price impact; fund managers may also swap shares bilaterally at the closing price.
- Implicit costs beyond the spread: market impact (your own trading moves the price), delay costs / slippage (filled late after the price moved), opportunity costs (never filled while the price moved).
- OTC markets are quote-driven: several broker-dealer market makers quote bids and asks and fill orders from inventory or by finding an offsetting order.
- OTC: highest likelihood of execution, but less transparency, no assurance of the best price, and dealers may pull back in stress; mostly smaller firms that skip or fail exchange listing.
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