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Additional Surveillance Measures

Also written ASM · ASM — Additional Surveillance Measures

An exchange surveillance framework that shortlists securities on unusual price and volume behaviour and client concentration, then raises margins and can narrow price bands.

In plain language

Graded Surveillance Measures look at whether a small company's valuation makes sense. Additional Surveillance Measures look at how its share is trading — sharp price swings, volume spikes, and a small group of clients doing most of the trading.

The stock is not accused of anything. It is put on a list, made more expensive to trade, and watched, so that anyone trying to push the price around finds it harder and anyone buying knows to be careful.

How it works

The factors ASM considers (section 14.5.2):

  • variation between high and low prices over the previous three months
  • variation in closing prices over 1 month, 60 days and 365 days
  • client concentration — the percentage of volume traded by the top 25 clients
  • variation in volumes over different time frames

The criteria vary partly with market capitalisation and P/E.

Not applicable to: securities already under GSM, securities in the trade-for-trade segment, securities on which derivative products are available, and public sector units.

Consequences: once shortlisted, the applicable margin rises to 80%. If the security meets further criteria, restrictions tighten — narrower price bands and margin of 100%. Stocks are reviewed after a minimum period and removed if they no longer meet the criteria on the review date.

The exchanges revise the detailed ASM parameters from time to time; the exam tests the workbook's framework above.

A worked example

Illustrative. A smallcap rises from Rs 60 to Rs 150 in three months while its daily volume increases tenfold, and the top 25 clients account for most of the traded volume. It is shortlisted under ASM.

An investor wants to buy 5,000 shares at Rs 120:

Trade value                     = 5,000 × 120 = Rs 6,00,000
Margin at the 80% stage         = Rs 4,80,000 up front
Margin at the 100% stage        = Rs 6,00,000 up front

At 100% the purchase is effectively fully funded in advance — leverage is gone. The narrower price band means the stock can move less in a day, in either direction.

Three months later the price has settled and concentration has fallen. On the review date the stock no longer meets the criteria and it comes off the list.

Why NISM asks about it

Chapter 14 (Legal and Regulatory Environment), section 14.5, sets GSM and ASM side by side. The standard questions: which framework is triggered by valuation and which by price-volume behaviour, the top-25-client concentration test, the exclusions, and the 80% / 100% margin figures.

Common exam traps

  • ASM = price, volume and client concentration. GSM = valuation not commensurate with fundamentals.
  • ASM does not apply to a security already under GSM, nor to trade-for-trade securities, F&O securities or PSUs.
  • 80% margin on shortlisting, 100% at the tighter stage — not the other way round, and not 50%.
  • The client concentration test uses the top 25 clients, not the top 10 or top 50.
  • ASM is not a finding of manipulation and it is not permanent: stocks leave when they stop meeting the criteria at review.
  • The closing-price look-backs are 1 month, 60 days and 365 days; the high-low look-back is three months.

Check yourself

  1. 1.What is the essential difference between GSM and ASM?

    1. a)GSM applies to large caps and ASM to small caps
    2. b)GSM identifies securities on valuation not commensurate with fundamentals; ASM shortlists on variations in price and volume
    3. c)GSM is run by SEBI and ASM by the exchanges independently
    4. d)GSM applies only to derivatives stocks and ASM only to cash market stocks
    Show the answer

    Answer: (b) GSM identifies securities on valuation not commensurate with fundamentals; ASM shortlists on variations in price and volume

    GSM is targeted on securities with low market capitalisation or net worth where the valuation is not commensurate with the business fundamentals.

    While GSM identifies securities based on its valuation, ASM identifies and short lists securities based on variations in the price and volumes of securities. It also takes into consideration the percentage of volume traded by the top 25 clients in certain cases.

    The GSM criteria are valuation numbers: companies with net worth less than or equal to Rs 10 crores and net fixed assets less than or equal to Rs 25 crores but trading at a negative PE or at a PE multiple that is 2x the PE of the benchmark index, and companies with market cap below Rs 25 crores but trading at PE ratio that is greater than 2x the PE of benchmark index or is trading at negative PE ratio with P/B ratio that is negative or 2x the P/B of the benchmark index.

    The ASM factors are all movement: variation between the high and low prices in the previous three months · variation between the closing prices over various time frames including 1 month, 60 days and 365 days · client concentration (i.e., percentage of volume traded by top 25 clients in each stock) · variation in the volumes traded over different time frames.

    Option D is wrong on both counts — securities on which derivative products are available are among those for which ASM is not applicable, along with securities that are already under GSM, securities that are placed under trade for trade segment and public sector units.

    Both are run jointly: SEBI along with the exchanges implement several surveillance mechanisms, and GSM securities shall be monitored by the Exchanges and SEBI.

  2. 2.Unhealthy practice in the securities markets includes which of the following?

    1. a)Disclosure
    2. b)Transparency
    3. c)Insider trading
    4. d)Surveillance
    Show the answer

    Answer: (c) Insider trading

    Insider trading. It is expressly prohibited — prohibit insider trading in securities is among the main functions of SEBI, and Regulation 4 of the SEBI (Prohibition of Insider Trading) Regulations, 2015 provides that no insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.

    The other three options are the market's defences against unhealthy practices, not examples of them.

    Disclosure is the mechanism the Research Analyst Regulations rely on throughout — a research analyst or research entity shall disclose all material information about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates.

    Transparency is the object of the whole framework: the regulations set forth requirements to foster objectivity and transparency in security research and provide investors with more reliable and useful information to make investment decisions.

    Surveillance is how the market is policed — in order to enhance the integrity of the market and to protect investor interest, SEBI along with the exchanges implement several surveillance mechanisms, namely GSM and ASM.

    And note the presumption that attaches to insider trading: when a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession.

Where this is taught

Free preparation for NISM Series XV

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