The Dual Role Of Artificial Intelligence In The Securities Market
- IJLLR Journal
- May 26
- 2 min read
Priya Rathi, B.Com. LLB (Hons.), Institute of Law, Nirma University
Shruti Agrawal, B.Com. LLB (Hons.), Institute of Law, Nirma University
ABSTRACT
Algo trading is not the future; it is the present. Traders like institutional investors or hedge funds do not trade manually; they have specialised software to trade and execute the orders. Algorithmic trading, or Algo trading, driven by computer programmes, is emerging as a dominant force in the financial market. The shift from traditional trading practices is transforming the structure and speed of the securities market and necessitating a re-evaluation of the existing regulatory framework. Algo trading increases market efficiency and liquidity, however it poses intricate challenges for the regulation of insider trading and unfair trade practices in the financial market.
When a trader uses unpublished price-sensitive information to derive an unfair advantage in the securities market, it constitutes insider trading. Detection of insider trading is becoming more difficult in the technology- driven trading environments, and the integration of artificial intelligence further complicates the regulation of the securities market. Although there exists an intensive regulatory framework governing and prohibiting insider trading, it faces limitations in addressing AI-automated trading, as it may obscure intent and evade traditional regulatory mechanisms.
While the artificial intelligence systems not only pose a risk for market abuse but also serve as a tool for detecting and preventing insider trading and unfair trade practices, particularly used by the Securities and Exchange Board of India to enhance surveillance through data analytics and pattern recognition. This necessitates analysing and examining whether the existing legal and regulatory framework governing insider trading is adequate to adopt algorithmic-driven trading mechanisms.
This paper examines the regulatory gaps and future challenges of algorithmic trading in the context of insider trading and unfair trade practices, and the adequacy of the existing legal and regulatory framework under the Indian Securities Laws. The paper also evaluates the role of SEBI in adopting technological tools for surveillance and regulating these tools in the prevention of market abuse practices, with the promotion of technological innovation in the securities market. Further, the paper studies cross-border challenges associated with algorithmic trading in identifying the intent in cases of insider trading and unfair trade practices.
