Some financial or commodities instruments are traded on
established exchanges. Examples include most highly-capitalized
which trade on exchanges such as the New York Stock Exchange, and
which trade on futures exchanges such as the Chicago Board of Trade. These
instruments are called exchange traded.
An instrument is traded
over-the-counter (OTC) if it trades in some context other than a
formal exchange. Most debt instruments are traded OTC with investment
banks making markets in specific issues. If someone wants to buy or sell a
bond, they call the bank that makes a market in that bond and ask for
quotes. Many derivative
instruments, including forwards,
swaps and most
derivatives are also traded OTC. In these markets, large financial
institutions serve as derivatives dealers, customizing derivatives for the
needs of clients.