Regulating AI In Indian Stock Trading: Ensuring Accountability, Transparency, And Investor Protection
- IJLLR Journal
- 5 hours ago
- 2 min read
Amrth Narayan, School of Law, SASTRA University
Laavanyaa Ramesh, School of Law, SASTRA University
ABSTRACT
The rapid integration of artificial intelligence (AI) into India’s stock trading ecosystem has revolutionised the speed, efficiency, and complexity of financial transactions. AI-powered algorithmic trading systems now autonomously execute buy and sell orders using real-time market data, technical indicators, and predictive analytics, greatly reducing the necessity for constant human oversight during market fluctuations. While these advancements expand market access and encourage data-driven investments, they also introduce significant legal and regulatory challenges concerning accountability, transparency, and investor protection.
A central issue lies in regulating AI trading model providers. In India, there is currently no dedicated legal framework specifically governing these entities. SEBI’s June 20, 2025, consultation proposes principles for responsible AI/ML use by market infrastructure institutions, intermediaries, and mutual funds. SEBI’s February 3, 2025, Circular on retail algorithmic trading, now effective October 1, 2025, begins operational controls through empanelment, strategy approvals, and unique algo IDs. In contrast, global jurisdictions such as the European Union and the United States have begun to implement stringent measures, including mandatory audits, licensing, algorithmic transparency, and advanced cybersecurity standards for AI- driven financial services. This regulatory gap in India creates ambiguity in assigning liability for software errors, market manipulation, or cyber breaches, which is further complicated by the “black box” nature of advanced AI models.
Additionally, while automated trading reduces the need for manual intervention, it exposes investors to risks like market volatility, technical glitches, and data miscalculations, potentially resulting in considerable losses. This paper critically examines the existing regulatory framework in India, compares it with global best practices, and promotes the establishment of stringent guidelines to guarantee accountability, operational transparency, and effective investor protection. Strengthening India’s regulatory framework is essential for promoting innovation while protecting investors in an increasingly automated stock trading environment.
