What characterizes over-the-counter (OTC) trading?

Over-the-counter (OTC) trading is characterized by transactions that occur directly between two parties without the involvement of a centralized exchange. This method allows for a more flexible negotiation process regarding price and terms compared to trading on a formal exchange. OTC trading is particularly common for financial instruments such as stocks, commodities, and derivatives that may not be listed on traditional exchanges.

In OTC markets, brokers or dealers facilitate the transactions, but the trades are not conducted through a central clearinghouse, which can lead to different risks compared to exchange-based trading. This structure allows for a wider range of products and customized terms that might not be available in the standardized format of an exchange.

The other options do not accurately reflect the nature of OTC trading: centralized exchanges and regulatory oversight are more characteristics of exchange-based trading, while the notion that OTC trading is limited to government securities is misleading since a wide variety of financial instruments are traded OTC.