Preempting the risks associated with rapid technological disruption, the Securities and Exchange Board of India (SEBI) notified a comprehensive regulatory framework governing Artificial Intelligence (AI) driven algorithmic trading. The rules are designed to prevent systemic market failures, flash crashes, and algorithmic market manipulation.
Key Points
- Mandatory API Audits: All stock brokers utilizing deep-learning AI models for trading must subject their Application Programming Interfaces (APIs) to bi-annual audits by SEBI-empanelled cybersecurity agencies.
- The ‘Kill Switch’ Mechanism: Mandates an automated, latency-free ‘kill switch’ that immediately halts all trading activity from an AI bot if it breaches predefined volume or volatility thresholds.
- Accountability Clause: Shifts the legal liability entirely onto the registered broker for any market manipulation resulting from an “AI hallucination” or rogue machine learning decision.
- Retail Protection: Distinctly separates regulations for institutional AI bots versus retail algorithmic platforms, banning the marketing of “guaranteed return” AI models to retail investors.
- Market Integrity: Prevents “quote stuffing” (flooding the market with massive fake orders to manipulate prices), ensuring that human traders are not unfairly disadvantaged by high-frequency machines.
Source Link: SEBI Circular: Regulation of AI and Algorithmic Trading
Q3. In financial markets, a ‘Flash Crash’—which SEBI’s new AI trading rules aim to prevent—is best described as:
A) A prolonged, multi-year economic recession affecting stock prices.
B) An extremely rapid, deep, and volatile fall in security prices occurring within a very short time period, often exacerbated by algorithmic trading.
C) The immediate freezing of bank accounts by the central bank.
D) A sudden, massive surge in initial public offerings (IPOs) in a single day.
