Surreal illustration of a broker controlling liquidity in OTC markets.

Is Your Broker Hiding Something? Uncover the Hidden Costs of Over-the-Counter Markets

Author's portrait.
Lena Voss in Business & Economy April 2025 • 4 min read.

"Liquidity misallocation in OTC markets can impact your investments. Learn how to navigate hidden fees and delays in over-the-counter trading for smarter financial decisions."


In the world of finance, over-the-counter (OTC) markets operate behind the scenes, facilitating the trade of assets that aren't listed on traditional exchanges. While these markets offer flexibility and access to a wide range of instruments, they're also known for their complexities and potential pitfalls. Ever experienced unexpected delays or higher costs when trading OTC? This is often due to liquidity misallocation, a situation where market inefficiencies distort asset prices and trading efficiency.

A new study sheds light on these hidden dynamics, revealing how dealers in OTC markets strategically manage liquidity to maximize their profits. By understanding these strategies, traders and investors can make more informed decisions and navigate the OTC landscape with greater confidence. This article will explore the core findings of this research, translating complex economic models into practical insights for everyday investors.

We will break down the key concepts, from dealer screening behaviors to the impact of market opacity, providing you with the knowledge to recognize and potentially mitigate the risks associated with OTC trading. Whether you're a seasoned investor or just starting out, understanding the nuances of liquidity in these markets is crucial for protecting your investments and achieving your financial goals.

Decoding Liquidity Misallocation: How OTC Markets Really Work

Surreal illustration of a broker controlling liquidity in OTC markets.

The central issue in OTC markets is that dealers and traders often have long-term relationships, yet the dealers don't always know the true value that traders place on the assets being traded. This information gap leads dealers to employ screening mechanisms, where they adjust trading speed and prices based on their assessment of a trader's potential profit. This strategic behavior, while profitable for the dealer, can create distortions in the market.

Imagine a scenario where a dealer has several clients: some eager to trade quickly for a high premium, others willing to wait for a lower price. The dealer, aiming to maximize profit, might prioritize high-urgency clients while delaying or even denying trades for those less willing to pay a premium. This is the essence of liquidity misallocation, where access to the market isn't equal, and the timing and cost of trades are influenced by factors beyond pure market forces.
  • Trade Breakdown: Trades with a small surplus don't happen at all.
  • Delayed Trades: Trades with intermediate surplus are slow.
  • High-Cost Trades: Trades with high surplus have big bid/ask spreads but happen quickly.
Several factors exacerbate these distortions. When valuations change rapidly, or when it's difficult for traders to form new relationships with dealers, the inefficiencies become more pronounced. Market opacity—the lack of transparency in pricing and trading activity—also plays a significant role, as it allows dealers to maintain informational advantages and further fine-tune their screening strategies. This leads to greater delays in trade and bigger differences between buying and selling prices for all involved.

Taking Control: Strategies for Navigating OTC Markets

While the complexities of OTC markets might seem daunting, understanding the underlying dynamics can empower you to make smarter investment decisions. By recognizing the potential for liquidity misallocation and the impact of dealer strategies, you can proactively manage your risk and seek opportunities for more efficient trading. Stay informed, diversify your strategies, and consider seeking expert advice to navigate the OTC landscape with greater confidence and achieve your financial goals.

Newsletter Subscribe

Subscribe to get the latest articles and insights directly in your inbox.