AI in the Stock Market: Navigating the Risks
Warren Buffett, known as the Oracle of Omaha, has long cautioned about the perils of high-risk investments, comparing them to a game of Russian Roulette where the odds may seem favorable, but a single misstep could be disastrous. This warning was directed at human decision-makers, who can be reasoned with or held accountable. However, with Artificial Intelligence (AI) and Machine Learning (ML) entering the financial arena, the risk landscape has become more opaque.
SEBI’s Proactive Measures
The use of AI in the stock market was spotlighted at the 23rd FICCI Capital Markets Conference 2026, where SEBI Chairman Mr. Tuhin Kanta Pandey announced the development of guidelines for the responsible application of AI and ML in the securities market. This framework aims to implement a tiered approach based on the risk level of each use case, and includes requirements for human oversight, enhanced data controls, and kill-switch mechanisms to swiftly halt AI systems exhibiting abnormal behavior.
Building on Past Initiatives
SEBI’s engagement with AI is not a new venture. In May the previous year, SEBI issued a circular mandating mutual funds to report their AI and ML applications. This Mutual Funds Circular required detailed reports on AI implementation and safeguards against abnormal functioning. The transition from a narrow reporting mandate to a comprehensive market-wide framework is facilitated by SEBI’s broad regulatory powers.
SEBI’s Regulatory Authority
SEBI’s extensive authority allows it to formulate rules, regulations, and issue advisories to maintain order and protect investor wealth in the securities market. The Supreme Court has affirmed SEBI’s credibility, highlighting its robust information-gathering mechanisms. The key question now is whether SEBI can keep pace with AI advancements and address the opacity AI brings to investment decisions.
Addressing AI’s Opacity
The Mutual Fund Circular sought to address AI’s opacity by requiring disclosures on AI models’ explainability. However, it remains unclear how SEBI will exercise its powers if dissatisfied with these disclosures, or what standards will be set for AI’s logic and information adequacy in giving advice. Fortunately, SEBI’s normative, executive, and adjudicatory powers equip it to tackle these challenges.
The Role of AI in SEBI’s Initiatives
While prohibiting AI use is not the solution, AI offers significant benefits in efficiency and fraud detection. SEBI itself leverages AI through initiatives like Project SUDARSAN, an AI-based surveillance tool that scans social media for fraudulent investment content, and R(AI)DAR, which reviews mutual fund advertisements for misleading claims.
Future Guidelines and Oversight
The upcoming guidelines present an opportunity for SEBI to establish clear human oversight requirements for significant decisions, enforce explainability standards, implement circuit-breaker protocols, and create a liability framework. As AI becomes more integrated in investment advisory and compliance, a proactive stance will enable India’s markets to harness AI’s benefits while mitigating its risks. If AI represents a game of Russian Roulette, SEBI ensures that the game remains safe by keeping the potential hazards in check.
Nakul Dewan is a Senior Advocate and King’s Counsel.
