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What is ASM : Meaning, Types, Stages and Significance

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Published Date: 23 Apr 2024Updated Date: 21 Jan 20256 mins readBy MOFSL

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The stock market is one such avenue where you can get rich quickly but also lose everything as quickly. The market is driven by a lot of speculation and this can end up hurting small-time traders.

The Securities and Exchange Board of India has introduced a framework known as Additional Surveillance Measures (ASM) to maintain safety parameters in the stock markets for small investors.

This blog deep dives into the meaning, types, stages, and significance of ASM, providing a clear understanding of its role in the financial markets.

What is ASM?

Additional Surveillance Measures (ASM) are part of a broader set of enhanced surveillance mechanisms aimed at protecting investor interests. These measures are initiated by SEBI and stock exchanges to monitor securities that show unusual trading activity or volatility, based on objective parameters like price variation and volume changes.

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The purpose of ASM is to alert and advise investors to exercise caution and encourage market participants to conduct due diligence when dealing in identified securities.

Types of ASM

ASM is divided into long-term and short-term frameworks, each with clear criteria for the selection of securities:

Long-term ASM targets securities based on criteria such as high-low price variation, market capitalisation, concentration of top clients, and more, over periods ranging from 3 months to a year.
Short-term ASM focuses on securities exhibiting significant close-to-close price variation and client concentration in shorter periods, such as 5 to 15 trading days.

There are exclusions for public sector enterprises and banks, securities under other surveillance measures, and those with derivative products available.

Long-term ASM Stages

Stage I: Initial Identification

Securities identified based on the ASM entry criteria are subjected to a 100% margin requirement starting from the T+3 day. This means investors must provide the entire value of the trade as a margin upfront.

Stage II: Increased Surveillance

The price band (the maximum range within which the security can move in a day) is reduced to the next lower level, and the 100% margin requirement is continued from the T+3 day. This restricts the stock's price volatility and continues the high margin requirement.

Stage III: Further Restrictions

Further reduction of the price band to the next lower level with a continued 100% margin requirement from the T+3 day. This stage imposes tighter limits on price movements, aiming to curb speculative trading further.

Stage IV: Maximum Surveillance

Settlement is conducted on a gross basis with a 100% margin requirement for all clients, and a very restrictive price band of 5% is applied. This means each trade is settled individually, not netted off against other trades, requiring full upfront margin and severely limiting price movement.

Short-term ASM Stages

The Short-term ASM framework follows a similar pattern, escalating from an initial identification based on specific variations in price and client concentration to stages where stricter margins and trading restrictions are applied. However, the focus is on shorter-term fluctuations, and the criteria and actions are adjusted accordingly to address rapid price movements and volatility.

Review and Exit from ASM

Securities in the ASM framework are regularly reviewed based on their performance. If security no longer meets the criteria for its current stage, it can be moved to a lower stage or exit the ASM framework entirely.

This staged review process ensures that the restrictions are only applied as long as necessary to maintain market integrity and protect investors.

Each stage in the ASM framework is carefully calibrated to introduce stricter measures to curb speculative and manipulative activities, to protect investors and ensure a stable and fair market environment.

The framework is dynamic, with securities moving between stages or exiting the framework based on their trading behaviour, ensuring that the measures remain relevant and effective.

Significance of ASM

Enhancing transparency: It alerts investors to potential risks, encouraging informed decision-making.
Promoting fairness: Monitoring and taking action on speculative or manipulative activities ensures a level playing field.
Protecting investors: ASM acts as a safeguard against sudden and unwarranted volatility, protecting investors from potential losses.

Conclusion

By understanding ASM's mechanisms you can navigate the stock market more safely, making informed decisions amidst the complexities of trading activities. The framework's dynamic nature, based on objective criteria and regular reviews, ensures its effectiveness in addressing market challenges and safeguarding the interests of the investment community.