Published On: May 25, 2026
Authored By: Anant Srivastava
Kirit P. Mehta School of Law, NMIMS Mumbai
Abstract
This article examines the transformation of financial markets driven by algorithmic trading, a form of automated trading in which computer programmes execute buy and sell orders at speeds far beyond human capability. In the early era of trading, investors spent considerable time analysing market patterns and manually selecting stocks. Today, a substantial portion of trading activity is handled by algorithms operating within milliseconds. This shift has improved market efficiency but has also introduced significant risks, including market instability, technological inequality among traders, and the potential for cascading automated failures.
The article reviews the Securities and Exchange Board of India’s 2025 circular on safer participation of retail investors in algorithmic trading, analysing the framework it establishes, the concerns it seeks to address, and the regulatory gaps that remain. It considers issues of market fairness, technological asymmetry, and systemic risk, and situates India’s approach within a comparative international context. The article concludes that while SEBI’s 2025 framework is a necessary and constructive step, the pace of technological development in financial markets demands continued and more comprehensive regulatory attention.
Keywords: Algorithmic Trading, High-Frequency Trading (HFT), Market Efficiency, Financial Markets, Automation, Speed and Latency, Market Volatility, Flash Crash, Accountability, Regulatory Challenges, Technological Asymmetry, Data-Driven Decision Making, Market Structure, Risk Management, Capital Allocation.
I. Introduction
On May 6, 2010, the United States stock market collapsed within minutes, losing approximately one trillion dollars in market value before recovering almost as quickly. This incident, now known as the 2010 Flash Crash, was unprecedented in the history of financial markets. Prices fell dramatically over the course of approximately 36 minutes, all triggered by a sequence of automated trading errors.[1] The event declared to the world that financial markets were no longer controlled solely by human judgment. Machines and algorithms had come to dominate trading activity, operating at speeds no human trader could match.
The Flash Crash marked a defining moment in the era of algorithmic trading. Algorithmic trading is a form of trading in which computers automatically buy and sell securities on behalf of investors, executing orders in fractions of a second. These systems are programmed with preset instructions designed to maximise returns based on market conditions. Profits are generated not through patient analysis but through the precision and speed of coded instructions. Algorithmic trading is not a new concept; it was initially used primarily by large institutions and corporations. However, advances in technology have made it increasingly accessible to ordinary investors through platforms and application programming interfaces (APIs).
There is no doubt that algorithmic trading has made markets more efficient, faster, and more accessible. However, it has also introduced serious concerns. Some traders can execute thousands of orders per second while others still trade manually, creating a structural gap in market participation. There is also the risk that when multiple automated systems interact with one another at high speed, outcomes can deteriorate significantly, as demonstrated by past market disruptions.
Recognising these concerns, the Securities and Exchange Board of India introduced a regulatory framework in February 2025 to make algorithmic trading safer, particularly for retail investors.[2] The framework seeks to bring accountability and traceability to a space that is growing increasingly complex. This article analyses SEBI’s 2025 framework, examines whether it adequately addresses the principal risks of algorithmic trading, and identifies the regulatory gaps that remain.
II. Legal Analysis
The rising prevalence of algorithmic trading has generated new legal challenges globally and has had a significant impact on financial markets worldwide. In India, algorithmic trading is legally permitted and is now subject to SEBI’s regulatory framework. On February 4, 2025, SEBI released the circular titled “Safer Participation of Retail Investors in Algorithmic Trading,” establishing a regulatory structure for algorithmic trading activity with a primary focus on protecting retail traders.[2] The circular identifies several market concerns and sets out guidelines directed at improving safety and fairness for market participants.
A. Market Fairness
One of the most significant concerns arising from algorithmic trading is the fairness of market participation. With the increasing prevalence of automated trading, a disparity has emerged among traders: those with access to sophisticated algorithms can execute trades far faster than those operating manually. To address this concern, SEBI’s circular requires that every algorithm be approved by the relevant stock exchange and tracked through unique identifiers. This is a meaningful step towards ensuring that algorithmic activity in the market remains transparent, identifiable, and subject to oversight, thereby supporting equal and fair participation across the trading ecosystem.
B. Technological Inequality
A related and equally significant concern is the uneven distribution of access to trading technology. Some market participants have access to advanced algorithms and cutting-edge infrastructure, while others continue to trade manually without equivalent technological support. SEBI’s circular attempts to bring greater control and traceability to API-based trading by introducing static IP requirements, authentication protocols, and restrictions on API access.[3] These measures improve the governance of how algorithmic trading is accessed. However, they do not directly address the underlying question of who possesses superior technology. Many high-frequency trades are executed using supercomputers and microwave transmission towers, which operate at speeds far beyond standard internet infrastructure. The circular’s access-control measures do not resolve the competitive advantage that such infrastructure confers on well-resourced participants.
C. Market Stability
The stability of financial markets is another major concern associated with the growth of algorithmic trading. Fast-moving automated systems interacting simultaneously at high speeds can amplify market disruptions, as multiple algorithms respond to the same market signals within milliseconds. SEBI’s circular addresses this risk through several measures, including mandatory stock exchange approvals for algorithms, requirements for audit trails, and provisions for monitoring algorithmic activity. These safeguards are directed at reducing the systemic risks associated with automated trading and are an important component of a credible regulatory framework for market stability.
D. Comparative Perspective
SEBI’s 2025 circular reflects India’s effort to bring structure to algorithmic trading and protect the interests of retail investors. Comparing India’s regulatory approach to those of other major jurisdictions reveals both similarities and meaningful differences in regulatory philosophy.
The United States Securities and Exchange Commission takes a stringent approach to algorithmic trading regulation, with a strong emphasis on pre-trade risk controls and compliance obligations under the Market Access Rule.[4] In the European Union, the Markets in Financial Instruments Directive II (MiFID II)[5] provides a comprehensive framework for monitoring algorithmic traders and ensuring orderly markets, having come into application on January 3, 2018. Both frameworks impose more detailed obligations on algorithm developers and deployers than SEBI’s current circular. India’s approach, while a constructive first step, remains relatively light in comparison, particularly with respect to pre-trade risk management requirements and obligations on algorithm providers rather than only on brokers and exchanges.
III. Statutory Framework and Supporting Authority
SEBI’s authority to regulate algorithmic trading derives from the Securities and Exchange Board of India Act, 1992.[6] Section 11 of the Act mandates that SEBI protect the interests of investors and ensure the proper functioning of the securities market. Section 11B empowers SEBI to issue directions and guidelines to market participants to ensure orderly and fair trading. The 2025 circular is issued in exercise of these statutory powers and reflects SEBI’s ongoing effort to adapt the regulatory framework to technological developments in financial markets.
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003[7] also play an important role in the governance of algorithmic trading. These Regulations prohibit market manipulation and unfair trade practices that could destabilise the securities market. The increasing use of automated systems in trading raises the risk of such manipulation, whether intentional or as an unintended consequence of algorithmic interactions, and SEBI’s regulatory guidelines for algorithmic trading serve as a complementary mechanism to monitor and control these risks.
Academic commentary has noted the tension between SEBI’s objective of encouraging innovation in capital markets and its obligation to safeguard retail participants from the risks created by that innovation.[8]
Conclusion
Algorithmic trading has fundamentally transformed the functioning of financial markets. What began as a tool available only to large institutional investors has become increasingly accessible to retail participants, making trading faster and more efficient. However, this shift has also made markets significantly more complex, raising serious questions about fairness, stability, and the adequacy of legal oversight.
In the contemporary financial environment, technology is evolving faster than regulation. SEBI’s 2025 circular on safer participation of retail investors in algorithmic trading is a positive and necessary step in addressing this gap. The circular’s requirements for algorithm approval, unique identifiers, audit trails, and API access controls represent a meaningful effort to bring accountability and transparency to automated trading. However, as this article has demonstrated, significant gaps remain, particularly regarding technological inequality among market participants and the absence of robust pre-trade risk management obligations comparable to those in the United States and the European Union.
The market continues to evolve rapidly, and the law must evolve with it. SEBI’s 2025 framework represents a credible beginning, but a comprehensive regulatory architecture for algorithmic trading in India will require further development to adequately protect all participants in an increasingly automated financial ecosystem.
References
[1] U.S. Securities and Exchange Commission & Commodity Futures Trading Commission, Findings Regarding the Market Events of May 6, 2010 (Sept. 30, 2010).
[2] Securities and Exchange Board of India, Circular No. SEBI/HO/MIRSD/MIRSDPoD/P/CIR/2025/0000013, Safer Participation of Retail Investors in Algorithmic Trading (Feb. 4, 2025), https://www.sebi.gov.in/legal/circulars/feb-2025/safer-participation-of-retail-investors-in-algorithmic-trading_91614.html.
[3] Securities and Exchange Board of India, Extension of Timeline for Implementation of Circular on Safer Participation of Retail Investors in Algorithmic Trading (Sept. 30, 2025), https://www.sebi.gov.in/legal/circulars/sep-2025/extension-of-timeline-for-implementation-of-sebi-circular-dated-february-04-2025-on-safer-participation-of-retail-investors-in-algorithmic-trading-_96979.html.
[4] 17 C.F.R. § 240.15c3-5 (2025) (SEC Market Access Rule).
[5] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments (MiFID II), 2014 O.J. (L 173) 349.
[6] Securities and Exchange Board of India Act, No. 15 of 1992, §§ 11, 11B, INDIA CODE (1992).
[7] SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, Gazette of India, Extraordinary, Part III, sec. 4.
[8] NLS Bus. L. Rev., Between Innovation and Safeguards: Analyzing SEBI’s 2025 Algorithmic Trading Circular (2026), https://forum.nls.ac.in/nlsblr-blog-post/between-innovation-and-safeguards-analysing-sebis-2025-algorithmic-trading-circular-part-ii/.
