Regulated markets are those that are subject to specific rules and regulations established by regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United States or the European Securities and Markets Authority (ESMA) in Europe. These markets are highly structured and standardized, with strict rules and procedures to ensure market transparency, fairness, and integrity.
Some examples of regulated markets are: Stocks, bonds, futures, ETFs…
Unregulated markets, also known as over-the-counter (OTC) markets, are decentralized markets where transactions occur directly between parties without the oversight of a regulatory organization. These markets are less structured and standardized than regulated markets, and rules and procedures are not always transparent.
Some examples of unregulated markets include the foreign exchange (forex) market, the contracts for difference (CFD) market, and the cryptocurrency market.
Historically, OTC markets were the first type of financial market. For example, during the 17th century, the options market was an OTC market, where traders met in London’s coffeehouses to negotiate contracts among themselves. Over time, regulated markets were created to govern the trading of stocks and other financial instruments, increasing transaction transparency and security.
A fundamental difference between regulated and unregulated markets concerns investor protection. Regulated markets are subject to specific rules to protect investors from fraud, market manipulation, and other illegal practices. For instance, the SEC in the United States requires publicly traded companies to provide comprehensive and accurate financial information to their investors. Additionally, regulated markets provide guarantee and insurance mechanisms, such as the investor protection fund, to safeguard investors in case of financial intermediary failure.
Conversely, unregulated markets do not offer the same level of investor protection. As transactions occur directly between parties, investors are exposed to a higher risk of fraud and market manipulation. Moreover, there are no guarantees or insurance mechanisms to protect investors in case of financial intermediary insolvency.
It is important to note that not all financial products traded in unregulated markets are inherently risky; however, investors should always conduct due diligence and carefully evaluate the risks before investing in any financial product, whether traded on a regulated or unregulated market.
