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SEBI Considers Delay on New Options Trading Penalties
The Securities and Exchange Board of India (SEBI) is reportedly contemplating a postponement of the implementation of a revised penalty structure for order-to-trade ratio (OTR) violations in options trading. This potential delay comes in response to feedback from the financial industry, which has raised concerns about the proposed increases in penalties. Market participants fear these hikes could lead to higher trading costs and diminished liquidity within the crucial options segment.
Refining OTR Calculation for Options
SEBI is also planning to introduce a new method for calculating OTR specifically for options contracts. The proposed approach involves a premium-based computation, where only orders placed beyond 40% of the option's premium or ₹20, whichever is higher, would be considered for OTR calculations. This aims to replace the current system, which relies on a band around the last traded price (LTP) and strike price, often criticized for being too wide and allowing excessive order placement without penalty.
Proposed Penalty Hikes Under Review
Under the initial proposal, SEBI had planned a steep increase in penalty slabs for high OTR breaches. For instance, penalties for daily OTR violations exceeding a ratio of 2,000 could have risen to 75 paise per order, a significant jump from the current 25 paise. Other penalty slabs, such as those for 50-250 orders or 250-500 orders, were also slated for substantial increases. However, sources suggest that these revised penalty slabs might not be rolled out alongside the computation changes at this juncture.
Industry Concerns Drive Potential Deferral
While there appears to be a general agreement on refining the OTR calculation methodology for options, the severity of the proposed penalties remains a point of contention. Industry stakeholders argue that the proposed jump in penalties is excessively steep and could disproportionately impact active options strategies, including market-making and hedging activities. Many believe a phased implementation would allow stakeholders to better understand the impact of the computation changes and potentially fine-tune the penalties accordingly.
SEBI's Regulatory Review
SEBI has been working on revising the OTR calculation methods and penalty structures for options since last year, but a formal draft paper has yet to be released. Previously, SEBI had explored other models, such as using theoretical prices or a fixed percentage of LTP, but these proposals were dropped due to concerns over complexity, transparency, or disproportionate impact on low-premium contracts.
Market Maker Exemptions Considered
Recognizing their vital role in maintaining market liquidity, the revised proposal also includes the consideration of excluding orders placed by designated market makers from OTR calculations. This acknowledges their function in providing continuous bid-ask quotes rather than solely focusing on generating trades.
Impact
A delay in implementing these stricter penalties could provide immediate relief to active options traders and market makers, potentially helping to maintain current trading costs and liquidity levels in the options market. This would allow market participants more time to adapt to potential changes. Conversely, if the penalties were implemented as initially proposed, it could lead to increased operational costs for traders and potentially affect trading volumes and strategies.
Impact Rating: 7/10