The Securities and Exchange Board of India has issued a circular dated February 4, 2026, revising the Order-to-Trade Ratio framework applicable to algorithmic trading. The revision impacts trading members, stock exchanges, and designated market makers operating in the cash and derivative segments.
The changes are the outcome of representations from stock exchanges, consultations with market participants, and recommendations of SEBI’s Secondary Market Advisory Committee. The objective is to make the OTR framework more practical while continuing to discourage excessive and non-productive order placement.
The revised provisions will come into effect from April 6, 2026.
Understanding the Order-to-Trade Ratio Framework
The Order-to-Trade Ratio framework is designed to control excessive order placement, particularly by algorithmic trading systems. A very high ratio of orders to executed trades can burden exchange infrastructure and may distort market quality.
To address this, SEBI requires stock exchanges to impose economic disincentives on trading members whose algorithmic orders breach prescribed OTR limits. Certain categories of orders are, however, excluded from penalty calculations to allow normal price discovery and liquidity provision.
The February 2026 circular refines these exclusions.
Key Revisions Introduced by SEBI
The circular introduces two important and targeted modifications to the existing OTR framework. These relate to equity option contracts and designated market makers.
Revised OTR Exemption for Equity Option Contracts
For equity option contracts, SEBI has introduced a wider and more flexible exemption band.
Under the revised framework, orders in equity option contracts will be exempt from OTR penalty if they are placed within:
- Plus or minus 40 percent of the Last Traded Price premium, or
- Plus or minus INR 20,
whichever is higher.
This modification is significant, especially for low premium options where percentage-based limits alone could be restrictive. By introducing a fixed rupee threshold, SEBI has provided additional operational flexibility to algorithmic traders while preserving the intent of the OTR framework.
Exemption for Designated Market Makers
SEBI has also clarified the treatment of algorithmic orders placed by designated market makers.
Algorithmic orders placed by designated market makers for market-making activity will not be considered while computing the Order-to-Trade Ratio.
This exemption recognizes the structural role of market makers. Market making involves continuous order placement and modification to provide liquidity, and such activity should not attract OTR penalties meant for excessive or disruptive trading behavior.
Existing OTR Exemptions That Continue to Apply
Certain core elements of the OTR framework remain unchanged.
- Orders placed within plus or minus 0.75 percent of the Last Traded Price continue to be exempt from OTR penalties for instruments other than equity options.
- The OTR framework remains applicable to both the cash segment and the derivative segment.
- Orders placed under liquidity enhancement schemes continue to fall within the scope of the OTR framework, except where specific exemptions apply.
These provisions ensure continuity and regulatory consistency.
Scope of Applicability
As per the revised circular, the OTR framework applies to:
- Orders in the cash market
- Orders in the derivative market
- Orders placed under liquidity enhancement schemes
However, algorithmic orders placed by designated market makers for market-making purposes are excluded from penalty computation. This distinction is now clearly embedded in the framework.
Effective Date of the Revised Framework
The revised OTR provisions will come into force from April 6, 2026. This lead time allows stock exchanges and trading members to update systems, recalibrate compliance checks, and align internal policies with the revised requirements.
Obligations of Stock Exchanges
SEBI has directed stock exchanges to take specific implementation steps. Stock exchanges are required to:
- Amend relevant bye-laws, rules, and regulations as necessary
- Implement the revised OTR framework operationally
- Inform all market participants, including trading members
- Disseminate the circular and its provisions on their websites
These steps are essential to ensure uniform and effective implementation across markets.
Practical Impact on Trading Members
Trading members engaged in algorithmic trading should closely review the revised exemptions, particularly for equity options and market-making activity. Key action points include:
- Reassessing OTR calculations under the revised thresholds
- Reviewing algorithmic trading strategies in equity option contracts
- Coordinating with exchanges on implementation details
- Updating internal compliance and risk management documentation before April 6, 2026
Early alignment will help avoid penalties and operational issues once the framework becomes effective.
Implementation Issues
The revised OTR framework is a sensible and market-responsive step, but it is not without risks. The expanded exemption for equity options, particularly the ±40 percent or INR 20 threshold, may permit higher order churn in low-premium or less liquid contracts, potentially weakening the original objective of curbing excessive and non-productive algorithmic activity. Similarly, while exempting designated market makers is justified given their liquidity role, it increases dependence on exchanges to strictly define and monitor genuine market-making behavior. If oversight is weak, there is a possibility that certain trading strategies could be structured to exploit exempt categories rather than improve market quality. As a result, the success of this update will depend less on the rule change itself and more on consistent supervision and enforcement by stock exchanges.
Conclusion
SEBI’s revision of the Order-to-Trade Ratio framework represents a calibrated regulatory update. It retains the core objective of controlling excessive order placement while addressing genuine operational concerns raised by market participants.
By introducing clearer exemptions for equity options and designated market makers, SEBI has improved the practicality of the framework without diluting market discipline. Trading members and exchanges that prepare early will be best positioned to comply smoothly with the revised regime.
Source: SEBI Circular dated 04/02/2026 on Revision of Order-to-Trade Ratio (OTR) framework