- SEBI widens the exemption band to ±0.75% of the last traded price for all algo orders.
- Equity options now enjoy a ±40% premium band or ±₹20 cushion, whichever is larger.
- Designated Market Makers (DMMs) get a clearer economic shield, potentially boosting liquidity.
- Fit‑and‑Proper person reforms promise faster approvals for new market intermediaries.
- Historical parallels suggest a short‑term surge in algo order flow, followed by tighter risk controls.
Most algo traders ignored the fine print on OTR penalties. That was a mistake.
Why SEBI's OTR Adjustment Targets Algo Market Makers
SEBI’s new framework, effective 6 April 2026, carves out a generous exemption corridor of ±0.75% around the last traded price (LTP). The regulator recognized that market makers rely on rapid order placement to keep bid‑ask spreads tight. By reducing the economic disincentive for high order‑to‑trade ratios (OTR), SEBI is essentially rewarding liquidity provision, not penalizing it.
For context, OTR measures the ratio of orders submitted to trades executed. A high OTR historically signaled “spam” orders that clogged the order book without resulting in fills, prompting penalties to curb abusive behavior. The new exemption means that as long as an algo’s orders sit within a tight price band, they will not be subject to the punitive fee structure. This aligns the rule‑making with the core purpose of DMMs: to absorb order flow and smooth price discovery.
How the New ±0.75% LTP Exemption Reshapes Option Pricing Strategies
Equity options receive an even broader cushion: ±40% of the option premium or a flat ±₹20, whichever is higher. Option premiums can be volatile, especially for near‑the‑money contracts. The widened band protects legitimate market‑making activity from inadvertent breaches, encouraging more aggressive quoting by DMMs.
Investors using delta‑neutral or gamma‑scalping strategies will notice tighter spreads as market makers feel freer to post competitive bids. The result is a potential reduction in implied volatility premiums, a boon for option buyers but a squeeze for sellers who rely on higher premiums to compensate for risk.
Sector Ripple Effects: Liquidity, Volatility, and Competing Exchanges
India’s equity derivatives market accounts for roughly 30% of total exchange turnover. A softer OTR regime can attract more algorithmic participants, amplifying order flow. Increased liquidity typically narrows the bid‑ask spread, lowering transaction costs for retail and institutional traders alike.
However, the benefit may be uneven across exchanges. Larger venues like NSE and BSE, which host the majority of DMMs, stand to gain the most. Smaller regional exchanges could feel pressure to adopt similar exemptions to stay competitive, potentially sparking a race to the bottom on fee structures.
From a macro perspective, the move dovetails with the broader push toward digitization in Indian capital markets. As more funds adopt systematic strategies, regulators are forced to balance market integrity with the need for efficient execution. The OTR tweak is a clear signal that SEBI is leaning toward the latter.
Historical Parallel: The 2020 OTR Tightening and Its Aftermath
In late 2020, SEBI introduced a stricter OTR penalty after observing a surge in “ghost” orders that inflated market depth without execution. The immediate effect was a 12% drop in algo‑order volume and a temporary widening of spreads. Over the next six months, participants adapted by calibrating their order‑routing logic, and the market rebounded to pre‑tightening levels.
The lesson is clear: regulatory shocks are often short‑lived, but they force a re‑engineering of algo strategies. The 2026 relaxation is likely to produce a reverse effect—an influx of order flow, followed by a period where risk models are updated to account for higher fill rates within the new bands.
Technical Definitions: Order‑to‑Trade Ratio, LTP, Designated Market Maker
- Order‑to‑Trade Ratio (OTR): The number of orders a participant sends divided by the number of those orders that actually execute. A lower ratio indicates efficient order placement.
- Last Traded Price (LTP): The most recent price at which a security changed hands. It serves as the reference point for the exemption bands.
- Designated Market Maker (DMM): A broker‑dealer authorized by the exchange to provide continuous two‑sided quotes, ensuring market depth and stability.
Investor Playbook: Bull and Bear Scenarios
Bull Case: Algo‑driven liquidity surges, spreads tighten, and option premiums compress. Traders who run delta‑neutral portfolios can capture lower execution costs while maintaining exposure. Institutions may increase allocation to systematic strategies, boosting fund inflows into Indian equity‑linked products.
Bear Case: The broader exemption may invite “order‑dust” that, while technically within the band, still contributes to market noise. If risk models are not updated, firms could see higher inventory risk, leading to abrupt pull‑backs by DMMs. A sudden reversal could widen spreads and reignite OTR penalties if volumes exceed the new thresholds.
Smart investors should monitor the following signals over the next quarter:
- Changes in average bid‑ask spreads across NSE and BSE equities and options.
- Volume trends for algorithmic orders versus manual orders.
- Regulatory filings indicating further adjustments to the fit‑and‑proper framework, which may affect market‑maker onboarding.
Positioning your portfolio to benefit from tighter spreads while hedging against potential inventory spikes will be the key to extracting alpha from SEBI’s latest move.