What Are Exchange Surveillance Measures

Understanding Exchange Surveillance Measures

Exchange surveillance measures include tools and rules set by market regulators like the Securities and Exchange Board of India (SEBI) and carried out by stock exchanges such as NSE and BSE. Their main goal is to promote fair trading practices and protect investors by closely monitoring securities that exhibit volatile or unpredictable trading patterns.

Securities that show potential risks are watched closely based on clear criteria like price changes, volume increases, and volatility. These securities are monitored using different surveillance categories, each with its own rules and limits to reduce risks. Here are the types of Surveillance Measures

Additional Surveillance Measures (ASM)

ASM is a regulatory framework introduced to monitor and control the trading of stocks that exhibit abnormal or speculative trading activities. The stocks placed under ASM are scrutinised for unusual price/volume variations or high volatility.

ASM typically involves:

    • Increased margin requirements for trading these stocks, which means traders need to have higher collateral to trade.
    • Stricter price bands to limit the daily price movement of these stocks.
    • Preventing excessive intraday trading and speculative behaviour by imposing trading restrictions.
    • Possible transfer of stocks to Trade for Trade segments, where each trade requires delivery to discourage speculative transactions.
    • The ASM framework is applied in stages, starting from identifying such stocks to imposing more stringent restrictions and continuous monitoring.

Graded Surveillance Measures (GSM)

GSM is a method that categorises securities by their risk profiles. It lets regulators apply surveillance measures that match the risk level of each security. This sorting helps maintain market liquidity and protects investors.

Enhanced Surveillance Measures (ESM)

ESM is a stricter version of surveillance that focuses on highly volatile or sensitive stocks. It involves closer monitoring and extra trading restrictions to prevent market abuse and protect investor interests.

Other Measures:

    • Trade for Trade (TFT) Segment: Securities in this segment require trade settlements on a delivery basis only. This discourages speculative trading. 
    • Margin Requirements: Higher margins reduce speculative risk since traders must commit more funds upfront. 
    • Disclosure Requirements: Companies with volatile stocks must provide better disclosures to keep transparency.

Purpose and Importance of Surveillance Measures

Surveillance measures are essential for keeping the financial markets stable. They serve several important roles:

     • Investor Protection: By limiting excessive volatility and speculative trading, surveillance measures help protect investor wealth. 
    • Market Integrity: These measures stop manipulation and unfair trading practices that could distort market prices. 
    • Risk Mitigation: Improved controls lower systemic risks that come from erratic price movements in certain securities. 
    • Transparency: New disclosure rules make sure that investors have access to accurate and timely information.
    • Confidence in Markets: When investors see that markets are well-regulated, overall market confidence improves, attracting more participation and promoting healthy market functioning.

How Surveillance Works in Practice

Stock exchanges utilise technology-driven surveillance systems to analyse real-time trading data. When a security crosses predefined thresholds for price or volume changes, alerts are generated. Regulatory authorities then evaluate these alerts for potential risks or market abuse.

For stocks under surveillance:

    • Brokers and investors receive cautionary notifications before placing orders.
    • Daily price bands may be tightened.
    • Margin requirements for trading such stocks are increased.
    • Regular reviews assess whether the stock can be de-listed from surveillance once normalcy returns.

Exchanges maintain surveillance dashboards to provide transparency on alerts, monitoring status, and communication related to these securities, enabling members and regulators to take timely actions.

Examples and Application in the Indian Market

In India, SEBI and stock exchanges actively implement surveillance measures identified under frameworks such as ASM and GSM. The measures have evolved to address emerging market dynamics, especially after episodes of extreme volatility or price manipulation in certain stocks.

For example:

    • Stocks that show erratic price or volume patterns are placed on the ASM list. Trading is monitored closely with higher margins and limited price bands.
    • Stocks with severe risk profiles may be moved to the Trade for Trade segment.
    • The surveillance system includes long-term monitoring where needed, which helps ensure market stability over extended periods.

These measures have significantly reduced market abuses and maintained investor confidence in the Indian stock markets.

Conclusion

Exchange surveillance measures are important regulatory tools that help keep markets fair and orderly. By watching securities that show unusual trading patterns and putting necessary restrictions in place, these measures protect investors and maintain market trust. Different surveillance methods, including Additional Surveillance Measures, Graded Surveillance Measures, and Enhanced Surveillance Measures—work together to manage risks linked to volatile stocks.

Their practical use improves transparency, lowers risks, and builds trust in financial markets. This supports a healthy trading environment. Understanding these measures helps investors make informed choices and navigate the stock market with greater awareness and caution.

This comprehensive view of exchange surveillance measures illustrates their significance in fostering a secure and reliable investment ecosystem.