SEBI relaxes OTR norms for equity options, exempts market makers’ algo orders

SEBI relaxes OTR norms for equity options, exempts market makers’ algo orders

• SEBI relaxes OTR rules for equity options, sets exemption at ±40% or Rs 20
• Algorithmic orders by market makers are exempt from OTR penalties
• New OTR norms will be effective from April 6, 2026

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Capital Market Regulator, Securities and Exchange Board of India (SEBI) has revised its Order-to-Trade Ratio (OTR) framework, easing compliance for equity options traders and exempting algorithmic orders placed by designated market makers from OTR penalties.

In a circular issued on Wednesday, SEBI said that for equity option contracts, orders placed within ±40% of the last traded price (premium) or ±Rs 20, whichever is higher, will be exempted from the framework for imposing penalties for high OTR. Earlier, the exemption threshold across segments was limited to a narrow band around the last traded price.

SEBI circular read, “Orders placed within the range of ±0.75% of the LTP shall be exempted from the framework for imposing penalty for high OTR. However, for equity option contracts, orders placed within the range of ±40% of LTP (premium) or ±INR 20, whichever is higher, shall be exempted from the framework for imposing penalty for high OTR”.

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What is OTR?

The Order-to-Trade Ratio (OTR) measures the number of orders placed, including modifications and cancellations, relative to trades executed by a trading member. A high OTR indicates excessive order placement with low execution or creating ‘noise’, often linked to algorithmic or high-frequency trading. Exchanges impose penalties on high OTR to curb market manipulation, reduce system congestion, and ensure fair trading.

Market Makers Algo trades will not face OTR scrutiny

SEBI has also decided that algorithmic orders placed by Designated Market Makers for market-making activity will not be considered for OTR computation, providing relief to liquidity providers operating under exchange-approved market-making schemes. The changes follow representations from stock exchanges, consultations with market participants, and recommendations of SEBI’s Secondary Market Advisory Committee (SMAC).

The proposal was under consideration since February 2024, was delayed due to concerns from some stakeholders. In the SMAC it was proposed that, for option contracts, instead of the current practice of computing OTR based on orders beyond ±0.75% from Strike Price+ LTP (Last Traded Price), the OTR may be computed based on orders beyond ± 40% from the LTP (Premium) of the option contracts.  Also, in order to ensure that a reasonable range is available for market participants to place the orders, for option contracts with a small premium value, it was proposed that a minimum absolute threshold of ± Rs. 20 around the LTP of the option contracts should be considered for OTR computation.

The revised framework applies to orders placed in the cash and derivative segments, including those under liquidity enhancement schemes, but explicitly excludes algorithmic market-making orders from OTR penalties.

The new norms will come into effect from April 6, 2026.

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