A Conceptual Study on Market Manipulation under the SECURITIES AND EXCHANGE BOARD OF INDIA Act, 1992

The study began from the observation that manipulation law was framed with human traders in mind and that AI strains its assumptions about intent, attribution and proof. It finds that the core of manipulation, an artificial distortion of price, volume or trading interest, survives technological change; that section 12A and the PFUTP Regulations are broad enough in principle to reach algorithmic conduct; that other jurisdictions have responded with express provisions on spoofing and governance duties for algorithmic systems; and that the Indian doctrine on attribution and proof is not yet settled. The hypothesis is therefore broadly supported, subject to the caveat that the case material is largely interim. The law does not need to be replaced. It needs to be clarified and extended so that responsibility rests with those who control automated systems. The recommendations below are proposals and not existing obligations. 1)        SEBI should issue a guidance note on the attribution of conduct produced by automated and AI systems, stating the principle of control and foreseeability and the documentation and testing standards expected of firms, developed in consultation with exchanges and industry. 2)     SEBI should require firms using algorithmic and AI systems to maintain a register, document objectives and constraints and test for manipulative potential before deployment, with proportionate obligations, and should build its own capacity to analyse automated systems and publish its methodology and fuller reasoning in algorithmic cases. 3)        Exchanges should strengthen surveillance for spoofing, layering, circular trading and front running, share methodologies with SEBI and consider pre-trade controls on cancellation of large orders designed to create false impressions. 4)     Parliament may consider an express provision on spoofing and layering, a clarification of whether intention is required in every case and, if not, when effect suffices, and whether penalties should reach those who knowingly supply technology or data for manipulation. 5)        The SAT and the Supreme Court should, in appropriate cases, give reasoned guidance on the relationship between the definition of fraud and intention, on the inference of intent from design and effect, on attribution for automated conduct and on the evidentiary value of expert analysis. 6)        Boards should treat governance of automated systems as a board-level responsibility, and professional advisers should be alert to manipulation risks in automated systems. The study has limits. It is primarily doctrinal and does not test its hypothesis against a systematic dataset of trading records, its account of enforcement relies on public orders that are interim and subject to appeal, its treatment of AI is simplified, the proposed framework should be tested with technical experts before adoption and the comparison is selective. These limits define an agenda for further work: an empirical study of SEBI orders on algorithmic trading, comparative work on attribution rules for automated conduct, research on technical detection and the standards of evidence it can support, and study of the intersection with the law on synthetic media and automated decision-making.

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