Taming the Algorithmic Beast: How Regulation can ensure Market Stability in the Age of AT?

Abstract

Algorithmic trading has become a dominant force in securities markets, revolutionizing how trades are executed and market dynamics unfold. This paper examines the evolution of algorithmic trading in India, its impact on market volatility, and the regulatory challenges it presents. The study traces the development of India's regulatory framework for algorithmic trading, from SEBI's initial guidelines in 2008 to more recent circulars addressing co-location services and retail algorithmic trading. While algorithmic trading offers benefits like increased efficiency and liquidity, it also raises concerns about market manipulation, unfair advantages, and amplified short-term volatility. The paper identifies key regulatory challenges, including oversight of third-party algorithm providers and distinguishing between legitimate and manipulative high-frequency trading strategies. To address these issues, the authors propose solutions such as mandatory registration for algorithm providers, enhanced disclosure requirements, and adaptive regulations that can evolve with technological advancements. The paper concludes that a balanced approach is necessary to harness the benefits of algorithmic trading while mitigating risks and ensuring market stability and investor protection in India's rapidly changing financial landscape.​