SEBI may delay the implementation of a revised penalty structure for order-to-trade ratio (OTR) violations and take it up for further review at a later stage, according to sources aware of the discussions. The move follows industry feedback against the proposed increase in penalties, citing risks of higher trading costs and reduced liquidity in the options segment.
The regulator also plans to shift to a premium-based OTR computation for options, where only those orders placed beyond 40 per cent of the option premium, or ₹20—whichever is higher—would be considered for OTR calculations.
Currently, orders placed within a 0.75 per cent range of the last traded price (LTP) are exempt from OTR penalties, with the threshold for options calculated using strike price plus LTP. This often results in a very wide band, allowing excessive order placement without penalty, according to industry participants.
Penalty Hike Under Review
SEBI is also considering a steep increase in penalty slabs for high OTR. Under the proposed structure, penalties for daily OTR breaches would rise sharply, with charges going up to 75 paise per order for ratios above 2,000, compared with 25 paise currently.
However, revised penalty slabs linked to the new framework may not be rolled out at this stage, sources said.
“There is broad agreement on the need to refine how OTR is calculated for options, but not fully on the severity of the revised penalties,” said one person familiar with the matter.
An industry source noted that the concern is that the jump in penalties is steep and could disproportionately impact active options strategies, particularly market-making and hedging activity.
“A phased implementation would help understand the impact of the computation change and allow room to tweak penalties further,” the source added.
OTR Framework Evolution
SEBI has been reworking the method for computing OTR for option contracts and the associated penalty structure since last year, though it is yet to release a draft discussion paper. An email query sent to SEBI seeking comments did not elicit a response.
Earlier proposals to use theoretical prices, such as Black-Scholes models, as proxies for LTP in illiquid contracts were dropped following objections related to complexity and transparency.
In prior discussions, SEBI also evaluated a model based on a 0.75 per cent change on the LTP alone, but this too drew criticism for disproportionately inflating OTR in low-premium contracts. Data analysis for two trading days in April showed a heavy concentration of option contracts in very low price buckets, making percentage-based thresholds highly sensitive.
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