Description

SEBI revises the OTR framework with modified exemptions for equity option contracts and exclusion of designated market maker orders from penalty calculations.

Summary

SEBI has revised the Order-to-Trade Ratio (OTR) framework applicable to algorithmic orders placed by Trading Members. The key changes include: (1) expanded exemption range for equity option contracts to ±40% of LTP (premium) or ±INR 20 (whichever is higher), compared to the standard ±0.75% of LTP for other instruments, and (2) exclusion of algorithmic orders placed by Designated Market Makers for market making activity from OTR computation. These modifications come into effect from April 6, 2026.

Key Points

  • For equity option contracts, orders within ±40% of Last Traded Price (premium) or ±INR 20 (whichever is higher) are exempted from OTR penalty framework
  • Standard exemption of ±0.75% of LTP continues to apply for non-option instruments
  • Algorithmic orders placed by Designated Market Makers for market making activity will not be considered in OTR computation
  • OTR framework applies to orders in cash segment and derivative segment, including liquidity enhancement schemes
  • Modified provisions in para 11.2.14.1 and 11.2.14.2 of Chapter 2 of the Master Circular for Stock Exchanges

Regulatory Changes

SEBI has modified paragraphs 11.2.14.1 and 11.2.14.2 of Chapter 2 of the Master Circular for Stock Exchanges and Clearing Corporations dated December 30, 2024:

Para 11.2.14.1: Introduces differentiated exemption thresholds - ±0.75% of LTP for general orders, but ±40% of LTP (premium) or ±INR 20 (whichever is higher) specifically for equity option contracts.

Para 11.2.14.2: Clarifies that while OTR framework applies to cash and derivative segments including liquidity enhancement schemes, algorithmic orders placed by Designated Market Makers for market making activity are now exempted from high OTR penalties.

These changes were made based on representations from Stock Exchanges, stakeholder deliberations, and recommendations of the Secondary Market Advisory Committee of SEBI.

Compliance Requirements

  • Stock Exchanges must amend relevant bye-laws, rules and regulations to implement the revised OTR framework
  • Stock Exchanges must notify market participants including Trading Members about the changes
  • Stock Exchanges must disseminate the circular provisions on their websites
  • Trading Members must adjust their algorithmic trading systems to account for the revised exemption thresholds
  • Designated Market Makers should ensure proper identification of their market making orders for exemption from OTR calculations

Important Dates

  • Circular Issue Date: February 4, 2026
  • Effective Date: April 6, 2026

Impact Assessment

Market Impact: The revised framework is expected to reduce the penalty burden on algorithmic traders in equity options, where wider bid-ask spreads are common. The higher exemption threshold (±40% or INR 20) better reflects the price dynamics of option contracts compared to equity instruments.

Operational Impact:

  • Algorithmic traders in equity options will have greater flexibility in order placement without triggering OTR penalties
  • Designated Market Makers will benefit from exemption of their market making orders, encouraging liquidity provision
  • Stock Exchanges need to update their surveillance and penalty computation systems before April 6, 2026

Stakeholder Impact:

  • Trading Members using algorithmic strategies in equity options: Positive impact due to relaxed exemption thresholds
  • Designated Market Makers: Positive impact as their core activity orders are excluded from penalty calculations
  • Market quality: Expected improvement through enhanced liquidity provision without penalizing legitimate market making activity

Impact Justification

Affects algorithmic traders and market makers with revised OTR penalty exemptions for equity options and designated market making activity