SEBI May Delay Order-to-Trade Ratio Penalty Hike Following Industry Concerns
SEBI is considering postponing the implementation of revised order-to-trade ratio penalty structure following industry pushback over proposed steep increases that could impact trading costs and market liquidity. The regulator plans to shift to premium-based OTR computation for options while excluding market maker orders from calculations.
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The Securities and Exchange Board of India (SEBI) may postpone implementing a revised penalty structure for order-to-trade ratio (OTR) violations, opting instead for further review at a later stage, according to sources familiar with the discussions. The potential delay comes in response to industry feedback expressing concerns about proposed penalty increases that could lead to higher trading costs and reduced liquidity in the options segment.
Proposed Changes to OTR Computation
SEBI plans to transition to a premium-based OTR computation system for options trading. Under this new framework, only orders placed beyond 40.00 per cent of the option premium or ₹20.00, whichever is higher, would be included in OTR calculations. This represents a significant departure from the current system, where orders placed within approximately 0.75 per cent of the last traded price (LTP) are exempt from OTR penalties.
The existing threshold for options is calculated using strike price plus LTP, which industry participants note often creates an excessively wide band that permits substantial order placement without penalty consequences.
Steep Penalty Increases Under Review
The proposed penalty structure includes substantial increases across all violation categories. The following table illustrates the dramatic changes being considered:
| OTR Range: | Current Penalty | Proposed Penalty | Increase |
|---|---|---|---|
| 50-250 orders per trade: | ₹0.02 per order | ₹0.10 per order | 400% |
| 250-500 orders per trade: | ₹0.10 per order | ₹0.20 per order | 100% |
| 500-1,000 orders per trade: | ₹0.15 per order | ₹0.25 per order | 67% |
| 1,000-2,000 orders per trade: | ₹0.20 per order | ₹0.50 per order | 150% |
| Above 2,000 orders per trade: | ₹0.25 per order | ₹0.75 per order | 200% |
However, sources indicate that these revised penalty slabs linked to the new framework may not be implemented at this stage due to ongoing concerns about their severity.
Industry Concerns and Implementation Challenges
One person familiar with the matter noted that while there is broad agreement on refining OTR calculations for options, consensus has not been reached regarding the severity of the revised penalties. Industry sources have highlighted that the substantial jump in penalties could disproportionately impact active options strategies, particularly market-making and hedging activities.
An industry representative suggested that a phased implementation approach would be more appropriate, allowing stakeholders to understand the impact of the computation changes before potentially adjusting penalties further. This measured approach could help balance regulatory objectives with market functionality.
Regulatory Framework Development
SEBI has been working on revising the OTR computation method for option contracts and penalty structure since last year but has yet to release a draft paper. The regulator has already abandoned proposals to use theoretical prices, such as Black-Scholes models, as proxies for LTP in illiquid contracts following objections regarding complexity and transparency concerns.
Earlier discussions included examining a model based on approximately 0.75 per cent of the LTP alone, but this approach also faced criticism for disproportionately inflating OTR in low-premium contracts. Data analysis conducted by SEBI for two trading days showed heavy concentration of option contracts in very low price buckets, making percentage-based thresholds particularly sensitive to market conditions.
Market Maker Exemptions
The revised proposal recommends excluding orders placed by designated market makers from OTR calculations, acknowledging their essential role in providing continuous bid-ask quotes to enhance market liquidity rather than generate trades. This exemption recognizes the distinct function market makers serve in maintaining orderly markets and ensuring adequate liquidity for all participants.
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