Sebi Revises Order-To-Trade Ratio Framework For Algo Trading – Here’s What It Means For Investors

The Securities and Exchange Board of India (Sebi) has revised the framework governing the order-to-trade ratio (OTR) for algorithmic orders, easing penalty norms for certain price bands and exempting market makers. This comes after stock exchanges and other stakeholders had raised concerns over the existing rules for algo trading. The changes will come into effect from April 6, 2026.

In a circular issued on February 4, Sebi said algorithmic orders placed within a band of plus or minus 0.75 per cent of the last traded price (LTP) will be kept out of the high OTR penalty framework. For equity options, the regulator has significantly widened the exemption and will no longer levy OTR penalties on orders placed within plus or minus 40 per cent of the option premium’s LTP or Rs 20, whichever is higher.

"For equity option contracts, orders within ±40 per cent of the LTP (premium) or ±INR 20, whichever is higher, shall be exempted from the framework for imposing penalty for high OTR," the circular said.

The regulator said the relaxation reflects the inherent volatility in option pricing, where premiums can move significantly over short periods, and is intended to prevent legitimate trading activity from being unfairly penalised.

Market-Making Algos Exempt From OTR Penalties

Another significant change is the exemption granted to market makers. Sebi said that “the Algorithmic orders placed by Designated Market Makers for market making activity shall not be considered towards computation of OTR” . The circular further clarified that while the OTR framework “shall be applicable to the orders placed in the cash segment and the derivative segment, including the orders placed under the liquidity enhancement schemes,” algorithmic orders by designated market makers will remain outside the penalty framework.

The OTR mechanism is designed to monitor the ratio of orders placed to trades executed by trading members and to discourage excessive order placements that could strain market infrastructure or distort price discovery. High-frequency and algorithmic traders, in particular, tend to place and cancel a large number of orders, often resulting in high OTRs.

Sebi has directed stock exchanges to amend their bye-laws and regulations as required and to disseminate the revised norms to market participants. The regulator said the changes aim to curb excessive order placement without impairing the smooth functioning of markets.

What It Means For Investors

For most retail investors, the the changes are unlikely to have a direct impact on their day-to-day trading. However, the impact is likely to be felt in the quality of the market they trade in. By easing OTR penalties for genuine algorithmic activity, particularly in options and market making, Sebi is trying to ensure that liquidity providers are not discouraged from placing orders.

In other words, this could mean tighter bid-ask spreads, better order depth and smoother execution. Better liquidity also helps prices reflect demand and supply more accurately, improving overall price discovery.

At the same time, Sebi has not done away with penalties altogether. Economic disincentives for excessively high order placement are still in place to deter disruptive practices such as excessive order cancellations.