Pros and cons of on-exchange trading
Pros of on-exchange trading
When you trade on exchange, the communication of bid and offer prices is centralised, which means that all market participants have access to the information. Anyone can buy or sell at one of the quoted prices or respond with a different quote.
This creates an even playing field, because traders can see market movements clearly and make more accurate predictions of their own – especially as the information supplied by an exchange is available to everyone.
Another positive is that trading on exchange is heavily regulated. Firstly, this means that there is more legitimacy given to the companies that are listed on an exchange. Secondly, this means that there is less counterparty risk, as the exchange acts as the counterparty instead of another independent party.
Cons of on-exchange trading
A potential disadvantage of trading on exchange is that exchanges very often have set open and close times for trading. This is in contrast to OTC markets like forex, which can be traded 24 hours a day.
Trading on exchange can sometimes be more expensive when compared to trading OTC. This is because there are more stringent requirements on companies seeking to be listed on exchanges, which can make their stock more expensive. However, this additional cost also comes with lower counterparty risk.