India tightens OTR scope
From April 6, SEBI will exclude certain options orders—those within ±40% of the last traded premium or ±Rs20, whichever is higher—from the order‑to‑trade penalty framework. That change shows regulators refining how message‑rate rules treat legitimate liquidity provision versus abusive traffic and will affect engines that encode quoting and cancel/replace behavior. (businesstoday.in)
India’s market regulator has made a very specific change to a very technical rule, and the specificity is the point. Starting April 6, India’s exchanges will stop counting a large set of equity options orders toward penalties for high order-to-trade ratios, or OTR, if those orders sit within a band of plus or minus 40 percent of the option’s last traded premium, or plus or minus Rs20, whichever is larger. The rule comes from a SEBI circular issued on February 4 and is now being implemented by exchanges including the NSE. Before this, the exemption band was far tighter: just 0.75 percent around the last traded price. That old threshold made more sense for calmer instruments. It fit options badly. OTR is a blunt measure with a simple idea behind it. Exchanges count how many orders a trading member sends, including modifications and cancellations, and compare that with how many trades actually happen. If the ratio gets too high, the exchange can impose economic disincentives. The target is message traffic that clogs systems without adding much real liquidity. In modern markets, that usually means algorithmic trading strategies that spray quotes and yank them back just as fast. But options are not ordinary instruments, and that is where the old rule started to look clumsy. Option premiums can jump sharply even when the underlying stock barely moves. A quote that looks “far” from the last traded premium by cash-market standards may still be part of normal market making in an options book. Using a 0.75 percent band for options effectively treated routine quoting behavior as suspicious. SEBI has now admitted that, without using those words. The new carve-out does not abolish the OTR regime. It redraws the line between noise and liquidity. Orders in equity options that fall inside the wider premium band will be excluded only for the purpose of imposing penalties for high OTR. The rest of the framework stays in place. Exchanges have also said there is no comparable change for the equity futures segment or the cash segment, where the old 0.75 percent exemption around the last traded price continues. That split tells you what regulators think the real problem is. They are not backing away from surveillance of high-speed order traffic. They are narrowing it so it hits the behavior they actually want to deter. SEBI’s February circular also excluded algorithmic orders placed by designated market makers for market-making activity from OTR computation altogether. That is another sign that the regulator is trying to stop punishing firms for doing the job markets need them to do: post quotes, absorb flow, and keep prices continuous. The practical effect lands inside trading engines. Any firm running options algos in India now has to encode a different logic for what counts toward OTR exposure. Quoting and cancel-replace behavior in equity options can be more aggressive inside the new band without triggering the same penalty risk. Firms that were already throttling messages to stay under the old framework may now loosen those controls in options while leaving futures and cash logic unchanged. Exchanges even ran mock trading for the revised functionality before rollout, which is a small but telling detail. This is not a philosophical change. It is a systems change.
