Description

SEBI revises the OTR framework by exempting equity option orders within ±40% of LTP or ±INR 20 and excluding 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 on Stock Exchanges. The key modifications provide exemptions for equity option orders placed within ±40% of Last Traded Price (LTP) or ±INR 20 (whichever is higher) from OTR penalties, and exclude algorithmic orders by Designated Market Makers engaged in market making activities from OTR computation entirely.

Key Points

  • Equity option 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 excluded from OTR computation
  • Cash segment orders within ±0.75% of LTP continue to remain exempted (existing provision)
  • OTR framework applies to both cash and derivative segments, including liquidity enhancement schemes
  • Changes made after considering representations from Stock Exchanges and recommendations from Secondary Market Advisory Committee

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 (Modified): Introduces differentiated exemption threshold for equity option contracts - orders within ±40% of LTP (premium) or ±INR 20 (whichever is higher) are exempted, while cash segment retains ±0.75% of LTP exemption.

Para 11.2.14.2 (Modified): Explicitly exempts algorithmic orders placed by Designated Market Makers for market making activity from the OTR penalty framework, while maintaining applicability to orders under liquidity enhancement schemes.

Compliance Requirements

Stock Exchanges must:

  • Amend relevant bye-laws, rules and regulations to implement the revised OTR framework
  • Notify all market participants including Trading Members about these changes
  • Disseminate the circular provisions on their websites

Trading Members should:

  • Review and adjust algorithmic trading strategies to align with revised OTR exemption thresholds
  • Update systems to account for new equity option order exemption parameters
  • Ensure awareness of market maker order exclusions from OTR calculations

Important Dates

  • Circular Issue Date: February 04, 2026
  • Effective Date: April 06, 2026

Impact Assessment

Market Impact: The revision provides relief to algorithmic traders in the equity options segment, where wider price bands are common due to volatility. The ±40% or ±INR 20 exemption acknowledges the different trading dynamics of options compared to cash/futures markets.

Operational Impact: Designated Market Makers gain operational flexibility as their algorithmic orders for market making are now exempt from OTR penalties, potentially improving liquidity provision. Stock Exchanges need to implement system changes to differentiate market maker orders and apply segment-specific exemption thresholds.

Regulatory Intent: While maintaining the OTR framework’s objective of discouraging excessive order placement relative to trades, SEBI has fine-tuned the rules to avoid penalizing legitimate algorithmic trading and market making activities that contribute to market quality and liquidity.

Impact Justification

Targeted relief for algorithmic traders and market makers in equity options segment; reduces penalty scope but maintains OTR discipline framework.