Quick take: over-the-counter trading explained

Kuwait is working to make its stock exchange, the oldest and fourth-biggest in the region, competitive with other regional exchanges while meeting international standards to attract more liquidity. In broadening its product offerings it launched on Sunday an OTC market for trading shares of unlisted companies - a first in the Arabian Gulf.

What is Over-the-Counter trading?

The phrase "over-the-counter" is generally used for stocks that trade through authorised dealers as opposed to a formal exchange where trades are executed through the exchange itself. OTC trading, which is prevalent in developed markets, usually involves trading shares in smaller companies, which may not meet stricter requirements of the main stock exchanges or may be reluctant to go public.

How is it different from regular trading?

There is little practical difference for investors between OTC and major exchanges as improvements in electronic quotation and trading have facilitated higher liquidity and better access to information. However, on an exchange, every party is exposed to offers by every other counter-party, which may not be the case in OTC trades executed through dealer networks. The trades, however, are regulated and cleared through the system as though they are on a main exchange. Companies are required to keep all records of shareholders through authorised clearing companies. Under the OTC rulebook, clients assume the responsibility for the risks that may result from such trades as they do in regular trading.

Do only stocks trade on OTC platforms?

Stocks of unlisted firms are not the only financial asset class that trades through the OTC exchanges or main exchanges that have OTC trading facilities. Debt instruments such as bonds or derivatives are also traded OTC through dealer networks. The OTC derivative market is significant in some asset classes such as interest rates, foreign exchange and commodities, according to Investopedia.

Why has Kuwait launched OTC trading?

The main objective is to create a new, credible and transparent investment system. Previously, trading of unlisted securities in Kuwait was a manual process that lacked full transparency, which undermined the credibility of prices and made the clearance on executed trades difficult.

How will it help Boursa Kuwait?

Kuwait is in the midst of a five-year programme to bring its capital markets in line with global standards and attract more foreign investment to the country. With an OTC market, it has broadened its product offering. The system simplifies procedures and will give small companies and start-up businesses that do not qualify for listing in the official market opportunities to grow.