WHEN THE MACHINE MANIPULATES: ALGORITHMIC TRADING, MARKET FRAUD, AND THE REGULATORY GAP IN SEBI’S PFUTP FRAMEWORK

AUTHOR – SATHVICK MADHUSHANKAR, STUDENT AT SCHOOL OF LAW, CHRIST (DEEMED TO BE UNIVERSITY), BANGALORE

BEST CITATION – SATHVICK MADHUSHANKAR, WHEN THE MACHINE MANIPULATES: ALGORITHMIC TRADING, MARKET FRAUD, AND THE REGULATORY GAP IN SEBI’S PFUTP FRAMEWORK, INDIAN JOURNAL OF LEGAL REVIEW (IJLR), 6 (2) OF 2026, PG. 672-680, APIS – 3920 – 0001 & ISSN – 2583-2344

ABSTRACT

Algorithmic and high-frequency trading now account for the majority of transactional activity in Indian equity and derivatives markets. The primary legal instrument for policing this activity, the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, was designed around a model of fraud as a deliberate human act susceptible to proof through intent, knowledge, and individual agency. Three structural tensions have emerged that this model cannot accommodate: the difficulty of attributing manipulative intent to an autonomous algorithm; the opacity of black-box trading strategies to regulatory oversight; and the absence of statutory provisions capable of addressing cross-product manipulation in a market where derivatives volume exceeds cash-market volume by an order of magnitude unmatched globally. The July 2025 enforcement action against Jane Street Group, the largest market manipulation proceeding in SEBI’s institutional history, illustrates each of these gaps concretely. Drawing on Indian securities jurisprudence, SEBI’s own recent regulatory instruments, and the comparative frameworks of the European Union and the United States, this article proposes a dedicated AI Market Conduct Regulation: a statutory instrument introducing effect-based liability for algorithmic manipulation, mandatory pre-deployment strategy disclosure, and cross-segment surveillance obligations proportionate to the risks that autonomous trading poses to price discovery and investor protection in Indian capital markets.

Keywords: Algorithmic Trading, Market Manipulation, PFUTP Regulations, SEBI, Jane Street, High-Frequency Trading, AI Regulation, Securities Law