SEBI Revises OTR Rules for Algo Orders, Eases Penalty Framework

The Securities and Exchange Board of India (SEBI) has revised its framework for the order-to-trade ratio (OTR) for algorithmic orders, easing penalty norms for certain price bands and exempting market makers. The changes will take effect from April 6, 2026.

The move comes after stock exchanges and other stakeholders raised concerns that the existing rules were too strict and could discourage genuine algorithmic trading, especially in the derivatives market.

What Is the OTR Framework?

The OTR mechanism tracks the ratio of orders placed versus trades executed by trading members. It is meant to discourage excessive order placements and cancellations, which can overload market systems and distort price discovery.

High-frequency and algorithmic traders often place and cancel a large number of orders in milliseconds. This can lead to high OTRs, even when the activity is part of legitimate trading strategies.

New Exemptions for Algo Orders Near Market Prices

Under the revised rules, SEBI has provided relief for algo orders placed close to the last traded price (LTP).

For cash market orders, algorithmic orders placed within ±0.75% of the LTP will not be counted under the high OTR penalty framework.

For equity options, SEBI has significantly widened the exemption. OTR penalties will no longer apply to orders placed within ±40% of the option premium’s LTP or ₹20, whichever is higher.

This change acknowledges that option premiums can move sharply in a short time, and the earlier narrow limits could unfairly penalise genuine trading activity.

Market Makers Get Full Exemption

Another key change is the exemption for designated market makers.

SEBI has clarified that algorithmic orders placed by Designated Market Makers (DMMs) for market making will not be included while calculating OTR. This applies even in cases where orders are placed under liquidity enhancement schemes.

This is important because market makers play a key role in providing liquidity by continuously placing buy and sell quotes.

What It Means for Investors

For most retail investors, these changes may not directly affect everyday trading. However, the broader impact could be felt through improved market quality.

With lower penalty pressure on genuine algo trading and market making, liquidity providers may be more willing to place orders. This can result in tighter bid-ask spreads, better order depth, and smoother execution.

At the same time, SEBI has not removed penalties completely. Disincentives for excessively high order placement still remain to curb disruptive practices such as aggressive order cancellations.

Read more: SEBI Proposes Revamp of ‘Fit and Proper’ Norms for Market Intermediaries.

Conclusion

SEBI’s updated OTR framework appears to be a balanced step. It continues to discourage harmful trading behaviour while ensuring that genuine algorithmic activity, especially in options and market making, is not unfairly penalised. Over time, this could help improve liquidity and price discovery for all market participants.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.