o Exchange Traded vs Over The Counter

Exchange traded stocks, futures contracts and options are trade in places like the NY Stock Exchange, NY Mercantile Exchange, Chicago Mercantile Exchange and other exchanges both domestically and around the world. The trades occur both on the floor of the exchange and electronically. Typically there is a clearing process and heavy regulation set up around the exchange.

Over the Counter (OTC) trades are executed outside of any formal exchange. The trade does not pass through the exchange floors or the exchanges electronic trading systems.

Both exchange trades and OTC trades are legitimate, accepted and widely used means of executing business for professional traders. Its up to the institution or individual trader on how best to achieve his trading goals of discovering price and volume. However, while exchange traded deals are cleared, Over the Counter deals are not cleared in all cases. At times, the deals are done as direct counterparty or bilateral transactions.

Going forward, all Over the Counter trades must be cleared. Clearing should include not only trades executed on Credit Default Swaps, but other asset classes such as energies and metals.