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What is the difference between listed and OTC options in London?

  • April 6, 2022
  • 4 min read
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What is the difference between listed and OTC options in London?

Two options are available in the London market – listed and OTC. Listed options are traded on a recognised exchange, such as the London Stock Exchange (LSE), and OTC options are those traded outside of an exchange between two parties. 

Listed options are generally considered more liquid than OTC options, as they are more easily transferred and have a wider pool of potential buyers and sellers. OTC options can be tailored to the specific needs of the buyer and seller, making them a more bespoke option.

Liquidity

OTC options are considered less liquid than listed options, as they are not traded on an exchange. There is a limited pool of prospective buyers and sellers for OTC options, leading to wider spreads and a less favourable price for the buyer. In contrast, listed options are more easily transferred and have a wider pool of potential buyers and sellers, making them more liquid.

Standardisation

Listed options are standardised, meaning that they adhere to specific rules and regulations laid out by the exchange, ensuring that all listed options are treated equally and fairly. OTC options are not standardised, as they are tailored to the specific needs of the buyer and seller. This can lead to an extensive range of options and a more bespoke product.

Transparency

Listed options are transparent, traded on an exchange, and all orders are publicly visible. So, the price of a listed option is fair and transparent. OTC options are not transparent, as the buyer and seller are typically the only people who know about the trade. It can lead to a less favourable price for the buyer and more significant uncertainty about the underlying security.

Execution

Listed options are always executed through a regulated broker. In contrast, any party authorised to trade options can execute OTC options. It increases the security of listed options and reduces the risk of fraud or manipulation. OTC options are less regulated, leading to a higher risk of fraud or manipulation.

Settlement

Listed options are settled through the exchange, ensuring that the buyer and seller receive the correct amount of shares and money. In contrast, OTC options are not settled through the exchange, leading to disputes about the settlement terms between the buyer and seller. Disputes can lead to delays in receiving the shares and money and increased uncertainty about the underlying security.

Fees

Listed options typically have lower fees than OTC options. Listed options are traded on an exchange, which means that the exchange charges a fee for each trade. In contrast, OTC options are typically traded through a broker, who charges a commission for each trade. It can lead to higher fees for the buyer of an OTC option.

Regulations

Listed options are regulated by the exchange, whereas OTC options are not regulated. Listed options are more secure and less likely to be manipulated. OTC options are less regulated, leading to a higher risk of fraud or manipulation.

Maturity

Listed options have a fixed maturity date, whereas OTC options do not have a maturity date. The buyer of a listed option knows when they will receive their shares and money. In contrast, the buyer of an OTC option does not know when they will receive their shares and money, leading to uncertainty about the underlying security.

Exposure

Listed options are exposed to the market, whereas OTC options are not exposed to the market. The price of a listed option is directly influenced by the market conditions, whereas the market conditions do not directly influence the price of an OTC option.

Availability

Listed options are available to all investors, whereas OTC options are not. Listed options are traded on an exchange, which means that they are open to all investors. In contrast, OTC options are typically only available to institutional investors or high-net-worth individuals. It can lead to a broader range of investors for listed options and a more liquid market.
You can trade listed options through Saxo Bank.