SEBI Modifies Order-to-Trade Ratio Framework For Algorithmic Trading. Key Changes Explained

Securities and Exchange Board of India (SEBI) on 4 February 2026 issued a targeted revision of the Order-to-Trade Ratio (OTR) framework that governs algorithmic trading by trading members and market participants.

The circular tightens the earlier economic-disincentive approach while carving out specific operational exemptions to curb excessive non-executed order traffic without penalising bona fide market-making and legitimate options activity. Will the changes reduce noise without undermining liquidity provision?

What Are The Key Changes SEBI has Introduced?

SEBI’s circular revises the OTR calculation and penalty triggers. Further, the regulator introduces explicit carve-outs for certain order types and participants. Some of these key measures are:

1. Exemption of certain equity-options orders placed within a defined price band from OTR penalty computation

2. Exclusion of algorithmic orders placed by designated market-makers for bona fide market-making activity

3. A refinement of the economic disincentive where penalties are calibrated to target truly excessive order-to-trade behaviour rather than routine quoting.

The regulator has set the effective date for these amendments as 6 April 2026 to give exchanges and members time for system changes.

Which Orders And Participants Are Exempted And Why?

Under the revised framework, equity option orders that fall within a tolerance band are excluded from penalty computation. SEBI specified that option orders within ±40% of the last traded premium or within ±₹20 (whichever is higher) around the last traded premium will be exempted, a pragmatic step recognising the wider premium swings and quoting needs in the options book.

This reduces the risk that high quoting activity intrinsic to options market-making is penalised as abusive OTR behaviour. Separately, algorithmic orders placed by designated market-makers while performing market-making obligations will not be counted towards a trading member’s OTR penalty computation, ensuring liquidity providers are not disincentivised. These carve-outs follow stakeholder feedback and recommendations from SEBI’s advisory committees.

How Will The Revised Penalty Mechanism Work And What Are The Practical Implications?

SEBI has retained the principle of economic disincentives, i.e., higher ratios attract higher penalties, but the computation will now exclude specified exempt orders and designated market-making flows.

Also, the stock exchanges need to utilise this revised calculation logic and report OTR metrics. Trading members will also need to tag orders accurately and demonstrate market-making activity.

Practically, proprietary and HFT participants that generate large volumes of fleeting orders unconnected to market-making or legitimate quoting will still face stronger penalties, while market makers and bona-fide options traders gain relief. Market participants should expect exchange rules and reporting templates to be updated ahead of the April 6 rollout.

Will This Change Reduce Market Abuse Without Hurting Liquidity?

The new SEBI rules balance two priorities: Reducing disruptive order noise that can mask spoofing and manipulative tactics. And preserving liquidity provision in derivatives markets.

By exempting market-making flows and a pragmatic options price band, SEBI attempts to avoid the blunt-instrument effect of earlier OTR enforcement. However, effectiveness will depend on implementation quality at exchanges, accurate order tagging, timely surveillance, and transparent disclosure of exchange-level OTR statistics. Early monitoring of exchange data post-implementation will determine whether the measure deters abusive high-OTR behaviour without raising bid–ask spreads or reducing quoted depth.

Sources:

SEBI

Economic Times

Money Control