Description

SEBI revises OTR framework with wider exemption bands for equity option contracts and excludes Designated Market Maker algorithmic 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 expanding the exemption band for equity option contracts from ±0.75% of LTP to ±40% of LTP (premium) or ±INR 20 (whichever is higher), and exempting algorithmic orders placed by Designated Market Makers for market making activity from OTR calculations. These modifications aim to address stakeholder concerns while maintaining effective economic disincentives for excessive order placements.

Key Points

  • For equity option contracts, orders within ±40% of LTP (premium) or ±INR 20 (whichever is higher) are now exempted from OTR penalty framework
  • Algorithmic orders placed by Designated Market Makers for market making activity are excluded from OTR computation
  • For other instruments, the existing ±0.75% of LTP exemption band remains unchanged
  • Changes based on representations from Stock Exchanges and recommendations of SEBI’s Secondary Market Advisory Committee
  • OTR framework continues to apply to orders in cash and derivative segments, including liquidity enhancement schemes

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:

Modified Para 11.2.14.1: Specifies differential exemption bands - ±0.75% of LTP for regular instruments, but ±40% of LTP (premium) or ±INR 20 (whichever higher) for equity option contracts.

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

Stock Exchanges must amend relevant bye-laws, rules and regulations to implement these changes.

Compliance Requirements

  • Stock Exchanges: Must amend bye-laws, rules and regulations as necessary to implement the revised OTR framework
  • Stock Exchanges: Must notify all market participants including Trading Members about these changes
  • Stock Exchanges: Must disseminate the circular provisions on their websites
  • Trading Members: Should review their algorithmic trading strategies, particularly for equity options, to understand the impact of wider exemption bands
  • Designated Market Makers: Can exclude their market making algorithmic orders from OTR calculations

Important Dates

  • Circular Issue Date: February 04, 2026 (SEBI), February 06, 2026 (NSE)
  • Effective Date: April 06, 2026
  • Implementation Period: Stock Exchanges have approximately 2 months to make necessary system and regulatory changes

Impact Assessment

Positive Impacts:

  • Reduces penalty burden on algorithmic traders in equity options segment where wider price bands are more appropriate for premium-based trading
  • Encourages market making activity by exempting designated market makers from OTR penalties
  • Addresses practical challenges faced by traders in options markets where ±0.75% band was too restrictive
  • May improve liquidity as algorithmic traders face fewer penalties for legitimate trading strategies

Market Implications:

  • Wider exemption bands for equity options (±40% or ±INR 20) significantly more accommodating than previous ±0.75% band
  • Market makers can operate more freely without concern about OTR penalties affecting their core function
  • Framework continues to discourage excessive order placement while allowing reasonable trading activity
  • No impact on cash segment or non-option derivatives where ±0.75% band remains applicable

Operational Impact:

  • Trading Members need to update risk management systems to account for revised exemption bands
  • Stock Exchanges require system changes to differentiate equity options and implement market maker exemptions
  • Compliance and surveillance systems need recalibration for the new parameters

Impact Justification

Moderately relaxes OTR framework for equity options and market makers, reducing penalties for certain algorithmic trading activities without fundamentally changing market structure