NSE Flags AI Use by Market Participants as Potential Business Risk
India's National Stock Exchange (NSE) has identified the use of artificial intelligence by market participants as a potential business risk. The exchange warned that AI could increase market volatility and complicate surveillance efforts.
The National Stock Exchange (NSE) of India has raised concerns about the proliferation of artificial intelligence (AI) among market participants, classifying its use as a potential business risk in its initial public offering (IPO) documents. The exchange highlighted that AI-driven trading strategies could amplify market volatility and create new forms of manipulation difficult to detect.
NSE, which derives a significant portion of its revenue from transaction charges, particularly from futures and options trading increasingly dominated by algorithmic and high-frequency traders, stated that the increasing deployment of AI strategies could lead to sudden and severe price dislocations. The inherent complexity of AI systems also presents risks, with the potential for inaccurate outputs due to data limitations or flawed algorithms. Furthermore, the rapid pace of AI innovation may outstrip existing regulatory frameworks and the exchange's own surveillance capabilities.
The exchange cautioned that failures in AI-based surveillance or risk management systems could impair its ability to monitor markets or correctly calculate margin requirements, potentially increasing systemic risk within India's capital markets. This concern is amplified by NSE's high trading volumes, which include billions of order messages and millions of trades executed daily.
Beyond trading risks, NSE also flagged emerging cyber threats, including AI-enabled attacks such as deepfake impersonation and social engineering. Such sophisticated attacks could expose confidential information or create new vulnerabilities through third-party AI services. Given NSE's critical role in India's financial ecosystem, a successful attack could have cascading effects on overall market confidence.
Global regulators, including the U.S. Securities and Exchange Commission (SEC) and the UK's Financial Conduct Authority (FCA), have echoed these concerns. They have warned about investment fraud facilitated by AI-generated deepfakes and the potential for autonomous AI trading agents to engage in market manipulation, such as insider trading or pump-and-dump schemes.