SEBI relaxes Order-to-Trade Ratio framework for algorithmic trading and equity options

The Securities and Exchange Board of India has significantly revised the Order-to-Trade Ratio (OTR) penalty framework applicable to algorithmic trading, through its circular dated 04 February 2026. These changes recalibrate how high OTRs are measured and penalized, with a particular focus on equity options and algorithmic orders placed by Designated Market Makers.

The revised framework modifies specific clauses of the Master Circular for Stock Exchanges and Clearing Corporations dated 30 December 2024, and will be operational from 06 April 2026. Recognized stock exchanges (excluding commodity derivative exchanges) must realign their systems, bye-laws, and communication processes to implement these updates.

Background: Why the OTR framework matters

What is Order-to-Trade Ratio?

The Order-to-Trade Ratio represents the proportion of orders entered to actual trades executed. In the context of algorithmic or high-frequency trading, a very high OTR may indicate excessive order placement, potential market abuse, or strain on exchange infrastructure. To address these concerns, SEBI previously mandated an economic disincentive regime for trading members with high OTRs, particularly in the algorithmic space.

Existing framework under the Master Circular

Under the Master Circular for Stock Exchanges and Clearing Corporations (Chapter 2, paras 7.1.2.2, 7.1.2.3, 11.2.14 and 11.2.15), stock exchanges are required to:

  • Compute OTR for algorithmic orders placed by Trading Members (TMs)
  • Impose incremental penalties or disincentives where OTR crosses prescribed thresholds
  • Apply this framework across cash and derivative segments, including liquidity enhancement schemes

The earlier regime provided only a narrow exemption:

  • Orders placed within a band of ±0.75% of the Last Traded Price (LTP) were not factored into the OTR penalty computation.

Market participants, including stock exchanges and other stakeholders, had expressed concerns that the framework was too restrictive for certain strategies, notably in equity options and genuine market-making activity. SEBI, after evaluating these representations and consulting the Secondary Market Advisory Committee, has now relaxed the regime.

Key regulatory changes introduced by SEBI

1. Extended exemption band for equity option contracts

A major modification is the creation of a specific, wider exemption for equity option orders when calculating OTR penalties.

Under the revised provision:

For equity option contracts, orders within ±40% of LTP (premium) or ±INR 20, whichever is higher, shall be exempted from the framework for imposing penalty for high OTR.

This is in addition to the existing 0.75% LTP exemption applicable generally.

Practical implication for market participants

  • In the case of equity options, the exemption no longer depends on a narrow ±0.75% band around LTP.
  • Instead, orders will be ignored for OTR penalty purposes if:
    • They fall within a ±40% range of the option premium, or
    • Within ±₹20 of the premium,
    • Whichever of these two limits is larger.

This effectively accommodates the higher volatility and wider quoting practices seen in options markets, removing a substantial portion of bonafide orders from OTR penalty computation.

2. Exclusion of Designated Market Makers’ algo orders from OTR

A second, equally important change is the treatment of algorithmic orders placed by Designated Market Makers.

SEBI has clarified that:

The Algorithmic orders placed by Designated Market Makers for market making activity shall not be considered towards computation of OTR.