The Securities and Exchange Board of India (SEBI) is planning to increase penalties on algorithmic and high-frequency traders for high orders against executed trades and refine computation methods of the order-to-trade ratio (OTR), according to sources.
The regulator tracks the ratio of total orders–including modifications and cancellations–to the number of trades executed by an algorithmic trading member within a specific period, as their trading strategies often lead to scope for market manipulation with large numbers of orders and few executed trades.
SEBI plans to increase the penalties imposed on such high OTRs, which were last revised in 2020. A consultation paper on the same is expected soon, sources said. An email query sent to the regulator seeking comment went unanswered.
OTR is the ratio of the volume of orders punched in to the total trades executed. OTR limits are in place to prevent bulk ordering by traders to check price manipulation and clogging the system. Penalties are imposed on traders for exceeding these limits.
Penalty hike
The penalty for a ratio of daily algo orders to trade between 50 to 250 is proposed to be increased to 10 paisa from the current fine of 2 paisa per order. The next slab, between 250 and 500, may see fines double from 10 paise to 20 paise.
For OTRs between 500 and 1000, the penalty might rise from 15 paise to 25 paise, while the 1000-2000 bracket may face 50 paise per order, up from 20 paise. The highest category—2000 and above OTR—could see penalties triple from 25 paise to 75 paise.
Traders with OTRs below 50 will continue to not be penalised. The cool off action of prohibiting traders with a ratio of 2000 or more on three occasions in the previous thirty trading days, will also likely continue.
Computation tweaks
SEBI is also planning to refine the computation methods and exclusions of the OTR framework, said sources. The ratio is proposed to be computed based on orders beyond 0.75 per cent from last traded price (LTP) instead of both the strike price and LTP.
Additionally, options contracts with a last traded price below ₹6.50, even a single tick away from LTP, may be treated as 0.75 per cent away from LTP. This adjustment stems from the fact that 20-25 per cent of index options and 40-45 per cent of stock options trade lower than ₹6.50, said sources.
However, only orders beyond 0.75 per cent or 0.50 per cent of LTP, whichever is higher, may be considered.
For contracts that haven’t been traded or where LTP is unavailable, SEBI has proposed using theoretical prices based on the Black-Scholes model—a standard practice seen in various global jurisdictions.
“On a given day, around 70-80 per cent of total contracts available are not traded, all of which gets included as part of OTR computation,” said a source. The parameters to be used in the Black-Scholes model will likely be decided jointly by the stock exchanges.
The move forms part of the regulator’s broader efforts to reduce manipulation and risks in the futures and options (F&O) market. The rapid growth of the derivatives market has led to increased speculation and potential manipulation, particularly by algo and high-frequency traders, market experts said.
