Description

SEBI revises the OTR framework with exemptions for equity option orders within ±40% of LTP or ±INR 20, and excludes Designated Market Makers' algorithmic orders from OTR computation.

Summary

SEBI has revised the Order-to-Trade Ratio (OTR) framework applicable to all recognized stock exchanges (except commodity derivative exchanges) through circular HO/47/11/16(2)2025-MRD-POD2/I/4113/2026 dated February 04, 2026. The revision introduces specific exemptions for equity option contracts and designated market makers’ algorithmic orders from the OTR penalty framework. These changes are based on representations from stock exchanges, stakeholder deliberations, and recommendations from SEBI’s Secondary Market Advisory Committee.

Key Points

  • For equity option contracts, orders within ±40% of Last Traded Price (premium) or ±INR 20, whichever is higher, are exempted from OTR penalties
  • Previous exemption of ±0.75% of LTP remains applicable for non-equity option instruments
  • Algorithmic orders placed by Designated Market Makers for market making activity are now excluded from OTR computation
  • OTR framework continues to apply to both cash segment and derivative segment orders, including liquidity enhancement schemes
  • Modifications update 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

Regulatory Changes

Modified Para 11.2.14.1: The exemption threshold for equity option contracts has been significantly widened from the standard ±0.75% of LTP to ±40% of LTP (premium) or ±INR 20, whichever is higher. This recognizes the different price dynamics and volatility characteristics of options compared to other instruments.

Modified Para 11.2.14.2: Designated Market Makers’ algorithmic orders for market making activity are now explicitly exempted from OTR computation. The framework continues to apply across cash and derivative segments, including liquidity enhancement schemes, but with this carve-out for market making activities.

Reference Paragraphs: The circular modifies paras 7.1.2.2, 7.1.2.3, 11.2.14 and 11.2.15 of Chapter 2 of the Master Circular dated December 30, 2024, which prescribe the framework for imposing economic disincentives on Trading Members with high OTR.

Compliance Requirements

For Stock Exchanges:

  • Make necessary amendments to relevant bye-laws, rules and regulations to implement the revised OTR framework
  • Bring provisions of this circular to the notice of all market participants including Trading Members
  • Disseminate the circular content on their websites

For Trading Members:

  • Understand and adapt to the revised exemption thresholds for equity options (±40% of LTP or ±INR 20)
  • Recognize that market making activity by Designated Market Makers is now exempt from OTR computation
  • Review algorithmic trading strategies to optimize order placement within new exemption parameters
  • Ensure compliance systems are updated to reflect the new framework

For Designated Market Makers:

  • Note that algorithmic orders placed specifically for market making activity are excluded from OTR computation
  • Maintain clear segregation between market making orders and other trading activities

Important Dates

  • Circular Issue Date: February 04, 2026
  • Effective Date: April 06, 2026
  • Implementation Period: Stock exchanges have until April 06, 2026 to amend bye-laws and notify market participants

Impact Assessment

Market Impact: The revision is expected to significantly reduce OTR-related penalties for participants trading equity options, given the substantially wider exemption band (±40% vs ±0.75%). This acknowledges the wider bid-ask spreads and price volatility inherent in options markets and should encourage more active options market participation.

Operational Impact:

  • Algorithmic trading firms will need to recalibrate their order management systems to account for the differential treatment of equity options
  • Market makers receive relief from OTR penalties on their market making activities, potentially improving liquidity provision
  • Reduced compliance burden and penalty costs for trading members operating in equity options segment
  • Stock exchanges must update surveillance and penalty computation systems before the April 06, 2026 deadline

Strategic Impact: The exemption for market makers’ algorithmic orders removes a disincentive for liquidity provision, potentially leading to tighter spreads and improved market quality. The wider exemption band for equity options recognizes market microstructure differences and should reduce friction in options trading.

Legal Authority: This circular is issued under Section 11(1) of the SEBI Act, 1992, read with Regulation 51 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, to protect investor interests and regulate securities markets.

Impact Justification

Significant revision to OTR framework affecting algorithmic trading strategies and penalties for all trading members dealing in equity options and market makers. Material impact on trading costs and compliance requirements.