OTC versus exchange: what actually differs

The order-book mechanics below hold in any market, but the worked example is priced in rand and the regulatory references are South African.

The phrase OTC vs exchange sounds like a preference. It is closer to a question of scale. Below a certain size an exchange is cheaper, faster and entirely adequate. Above it, the mechanism that makes an exchange efficient — a public order book that anyone can trade against — starts working against you, because your own order is the largest thing in it.

This page explains the mechanics rather than asserting a conclusion, and it uses invented numbers so you can follow the arithmetic. We do not publish rate comparisons against named firms; what follows compares service models.

How an order book actually fills

An exchange keeps two lists: bids, from people willing to buy, and asks, from people willing to sell. The highest bid and the lowest ask are the top of the book, and the gap between them is the spread. The price you see quoted is the top of the book, and it applies only to the volume sitting at that level.

A limit order joins the book at a price you choose and waits. It may never fill. A market order executes immediately against whatever is there, level by level, until your quantity is exhausted. What you receive is the weighted average of every level you consumed, which is worse than the top-of-book price you were looking at. The difference is slippage.

A worked example, with invented depth

Suppose you want to sell 5 BTC on a local venue and the bid side of the book looks like this. These figures are illustrative and are not a snapshot of any real market.

The screen said R2 000 000. Your fill is 0.8 at 2 000 000, 1.1 at 1 994 000, 1.4 at 1 987 000, 1.2 at 1 978 000 and 0.5 at 1 966 000. That averages roughly R1 985 000 per BTC, so the five coins produce about R9 925 000 instead of the R10 000 000 the top of the book implied. The shortfall is about R75 000, or 0.75 per cent, and no fee schedule mentions it.

Now add two real-world effects. First, the book is visible: other participants can see a large order arriving and adjust. Second, depth is not restored instantly, so a second tranche a few minutes later may fill worse than the first. Working the order in slices reduces the immediate impact but extends your exposure to the market moving while you are half done.

What an OTC desk does instead

A desk quotes a single price for the entire amount, in writing, and holds it for an agreed window. When you accept, the price is yours: the desk now carries the risk of sourcing or unwinding the position, and if the market moves against it in the meantime, that is the desk’s problem, not yours. That transfer of execution risk is what the spread pays for.

Because the trade never touches a public book, there is no visible order for anyone to trade ahead of, and there is no partial fill. You either have a rate on the whole amount or you have nothing.

Model against model

This compares service models rather than the pricing of any named provider.

Counterparty risk, stated honestly

Both models carry counterparty risk; they carry different shapes of it.

On an exchange, your risk is concentrated in the time your balance sits on the platform. History across several jurisdictions has shown what happens when a venue fails or halts withdrawals: the asset was legally yours and practically unreachable. That risk is proportional to how long you leave value there, which is why moving off a platform promptly is a habit worth having.

With a desk, the risk is settlement risk, concentrated in the minutes between one leg and the other. You reduce it by checking who you are dealing with before you send anything: the registered entity, the licence position, the physical address, and a communication channel you have verified independently. Our scam guide sets out the verification steps, and large-volume trades explains how the desk sequences a big ticket.

Where each one wins

Use an exchange when

• The amount is small relative to the visible book.
• You want to trade in and out, at your own pace, without speaking to anyone.
• You are accumulating gradually and the fee is the dominant cost.
• You want a public price you can watch continuously.

Use a desk when

• The ticket is large enough that slippage would exceed the spread.
• You need to know the exact rand figure in advance, because a conveyancer, a supplier or a tax computation depends on it.
• You want one settlement with a written confirmation rather than a series of partial withdrawals.
• The asset or the network is awkward, and you want the route confirmed before you send.
• You would rather deal with a person who can be held to what they said.

How to decide, without taking anyone’s word for it

1. Look at the depth on the venue you would use, at the time of day you would trade, for the size you actually have.
2. Estimate the average fill by walking the book, as in the example above.
3. Add the platform fee and any withdrawal fee.
4. Ask a desk for an indicative rate on the same size, then a firm one.
5. Compare the total rand you would receive, not the headline percentages.

Our live rates page gives indicative pricing so you can size the comparison, and fees and limits sets out how the desk margin narrows as a ticket grows. Indicative pricing exists so you can plan, not so you can rely on it: a firm rate is only firm once a trader confirms it in writing.