AI trading risks herding and amplified volatility, regulators must adapt fast: Chief Economic Adviser Nageswaran

Chief Economic Advisor V Anantha Nageswaran (file image)

“Financial stability in the coming decade may depend significantly on regulators' ability to understand and supervise risks embedded in digital and AI-enabled finance,” Chief Economic Adviser Dr. V. Anantha Nageswaran said on the dual-edged impact of artificial intelligence on global capital markets.

In his keynote at the Global Securities Markets Conclave 2.0, organized by GIFT-IFSCA, Nageswaran outlined how advances in AI are fundamentally changing capital allocation while introducing new vulnerabilities that regulators must address. He explained that AI lowers the cost of prediction, speeds up information processing, and enables decisions at unprecedented scale and velocity. “Portfolio allocation, risk assessment, and liquidity management are increasingly influenced by algorithmic systems capable of learning continuously from vast data sets,” he said.

However, this efficiency comes with risks. Nageswaran referenced the IMF's Global Financial Stability Report of October 2025, noting a “rising tendency towards herding behaviour, as global investors rely on similar AI models and respond rapidly to micro-information transmitted through digital and social platforms.” These dynamics, he added, raise the possibility that financial cycles could become “both longer and more amplified,” with shocks transmitting quickly across borders.

“Algorithmic trading and AI-driven investment strategies can transmit shocks rapidly across jurisdictions and amplify market movements,” Nageswaran stated. Supervisory frameworks, therefore, need to evolve to detect model-based herd behavior, operational vulnerabilities, concentration risks in critical AI supply chains, and systemic feedback loops.

He emphasized that as informational barriers decline, opportunities grow for economies demonstrating transparency, institutional credibility, and technological capability, but so do policy responsibilities. “These developments raise the possibility that financial cycles may become both longer and more amplified,” he reiterated, underscoring the need for regulators to stay ahead of embedded digital risks.