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, with the risk 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 about 0.75 per cent 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 that allows excessive order placement without penalty, said industry participants.
Penalty hike
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.
Penalties for the 50-250 orders-per-trade slab may rise to 10 paise from 2 paise per order. The next slab, between 250 and 500, may rise from 10 paise to 20 paise; 500-1,000 could go from 15 paise to 25 paise; and 1,000-2,000 from 20 paise to 50 paise.
However, revised penalty slabs linked to the new framework may not be rolled out at this stage, the 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 said that the concern is that the jump in penalties is a bit steep and could disproportionately impact active options strategies, especially market-making and hedging activity. “A phased implementation would help understand the impact of the computation change to possibly tweak the penalties further.”
OTR framework
SEBI has been reworking the method for computing OTR for option contracts and the penalty structure since last year, but is yet to come out with a draft paper. An email query sent to SEBI seeking comments did not elicit a response.
Proposals to use theoretical prices, such as Black-Scholes models, as proxies for LTP in illiquid contracts have already been dropped after objections over complexity and transparency.
In earlier discussions, SEBI examined a model based on about 0.75 per cent of the LTP alone, but this too drew criticism for disproportionately inflating OTR in low-premium contracts. Data analysis carried out by the regulator for two trading days in April showed a heavy concentration of option contracts in very low price buckets, making percentage-based thresholds particularly sensitive.
The revised proposal also recommends excluding orders placed by designated market makers from OTR calculations, recognising their role in providing continuous bid-ask quotes to build liquidity rather than generate trades.