PRICE DISCOVERY AND MARKET QUALITY IN THE AGE OF ALGORITHMIC TRADING: EVIDENCE FROM THE NATIONAL STOCK EXCHANGE

Algorithmic trading has become an important part of modern financial markets. In India, the National Stock Exchange (NSE) has developed into a highly electronic and technology-driven market in which trading algorithms can respond to information within very short periods of time. This paper examines how the growth of algorithmic trading may have affected market quality on the NSE, focusing on three measures: bid-ask spreads, intraday volatility and the speed of price discovery. It also considers the regulatory framework developed by the Securities and Exchange Board of India (SEBI) to manage the risks associated with automated trading. Previous research on the NSE suggests that algorithmic trading can improve the speed with which information is incorporated into prices, but it can also reduce liquidity provision during periods of market stress. The paper therefore argues that the effect of algorithmic trading is not uniformly positive or negative. Its impact depends on market conditions, the type of trading strategy used and the effectiveness of regulatory safeguards.