Define 'over-the-counter' (OTC) trading.

Over-the-counter (OTC) trading refers to transactions that take place directly between two parties without the oversight of a formal exchange. This type of trading contrasts with exchange trading, where trades are conducted through centralized platforms that provide significant regulatory oversight and transparency.

OTC trading is significant in various securities, such as stocks not listed on formal exchanges, derivatives, and currencies. It offers greater flexibility and can cater to specialized investment needs or trading strategies that may not fit within standard exchange parameters. The nature of OTC trading allows businesses and investors to negotiate terms directly, coming to agreements based on their mutual requirements.

This method can also foster a more personalized trading experience, albeit with increased risks due to the lack of regulation and transparency compared to exchange-traded securities. Understanding OTC trading is crucial for grasping the full landscape of financial markets and how different trading environments operate.