Sebi eases order-to-trade ratio framework for algorithmic trading

Regulator widens exemption limits and excludes market-making activity from OTR penalty calculations

Market regulator Securities and Exchange Board of India (Sebi) on Tuesday eased the order-to-trade ratio (OTR) framework for algorithmic trading by expanding the exemption limits for equity option contracts and excluding certain market-making activities from penalty calculations.

 

Under the revised norms, algorithmic orders in equity options placed within ±40 per cent of the last traded price (LTP) premium or Rs 20, whichever is higher, will be exempt from penalties imposed for high OTR.

 

Earlier, the exemption threshold was significantly narrower, leading to concerns among market participants about frequent penalisation, particularly in options trading.

 

Sebi has also exempted algorithmic orders placed by designated market makers for market-making activity from the computation of OTR. The move is aimed at supporting liquidity provision while ensuring that penalties target only excessive and non-economic order placements.

 

 

The changes follow representations from stock exchanges, stakeholder consultations, and recommendations of Sebi’s Secondary Market Advisory Committee. The revised framework modifies provisions of the master circular for stock exchanges and clearing corporations issued in December 2024.

 

The OTR framework applies to orders placed in both the cash and derivatives segments, including those under liquidity enhancement schemes. However, with the latest changes, market-making algorithmic orders will no longer attract penalties for high order cancellations.

 

The revised norms will come into effect from April 6, 2026. Stock exchanges have been directed to amend their bye-laws and regulations accordingly and to disseminate the changes to market participants.

 

Sebi said the revisions are intended to balance market efficiency and liquidity while continuing to deter disruptive trading behaviour.