Sebi changes the Order-to-Trade Ratio framework for algorithmic trading. Key changes explained

Markets regulator Securities and Exchange Board of India (Sebi) has announced changes in the Order-to-Trade Ratio (OTR) framework with respect to algorithmic orders placed by Trading Members (TMs). These changes, which will come into effect from April 6, 2026, aim to refine the economic disincentives for high OTR by introducing specific exemptions for certain contracts and market participants, based on feedback and recommendations from stakeholders.Under the changes, the general exemption range will apply to orders placed within ±0.75% of LTP and will now be exempt. Meanwhile, orders for stock option contracts within a range of ±40% of the Last Traded Price (LTP) will be exempt from the OTR penalty framework. This exemption is also applicable if the order is within ±Rs 20 of the LTP, whichever is higher.

This adjustment recognizes the specifics of the pricing of options contracts and aims to avoid unnecessary penalties for legitimate trading within a reasonable price range.The changes come after Sebi recognized the crucial role of algorithmic orders placed by Designated Market Makers, specifically for market making activities to ensure liquidity and price discovery in the market.

This framework, previously established by the Master Circular for Stock Exchanges and Clearing Corporations dated December 30, 2024, was issued to implement effective economic barriers to high OTR of algorithmic orders. The system monitors the ratio between the number of orders placed and the transactions executed by TMs.

The circular has instructed the stock exchanges to take necessary measures to implement these changes.

In other news, the market regulator proposed a comprehensive overhaul of the ‘fit and proper person’ framework for market intermediaries, aiming to bring greater procedural clarity and fairness to the regulatory process. In its consultation paper, Sebi proposed amendments to Schedule II of the Intermediaries Regulations, 2008, which deals with the ‘Fit and Proper Person’ criteria applicable to intermediaries, their key management personnel (KMPs) and persons in charge.

On this basis, the regulator has proposed to clearly codify the right to a hearing, refine the scope of disqualifying events and reduce regulatory uncertainty for applicants and intermediaries.

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