Investing in the stock market is always associated with risks. These risks are usually any such occurrences that eventually lead to the investors’ loss or even capital erosion.
While most risks arise out of natural market behaviour, there are certain cases where an investor’s interest is compromised due to malicious activities. To refresh your memory, the stock market crash of the 1980s caused by Manu Manek and the Harshad Mehta scams are two of the most prominent market manipulations to date.
Apart from these man-made fluctuations, technical glitches and errors also cause the stock market to misbehave.
But whether it’s people causing these problems or machines; at the end of the day, what’s compromised is the investor’s interests and the exchange and regulatory bodies’ credibility. Neither the authorities nor do the other market participants want this.
But the stock market’s behaviour is beyond anyone’s control. And although these fluctuations cannot be stopped, the regulators have put in safeguards to protect the investors as well as the exchanges themselves. Among these safeguards are, Graded Surveillance Measure (GSM), Upper & Lower Circuits, and Additional Surveillance Measure (ASM) to name a few.
Today we discuss and understand the mechanics of ASM. So let’s get right to it.
What are Additional Surveillance Measures (ASM)?
Additional Surveillance Measures are specific limitations that get put on stocks that experience price fluctuations that are uncharacteristic to said stock. But how does a price fluctuation get categorized as uncharacteristic?
To answer that question, we need to understand a different concept from the stock market first. This concept is called fair market value. Fair market value is the price level that a share is “supposed to be at”. This ideal price is decided based on the company’s performance. The price of a company’s shares always moves towards the fair market value of the company.
In the stock market, the prices oscillate, they don’t necessarily stay stagnated on the fair value. These oscillations occur whenever there is a change in the demand or supply of the share as various market participants buy or sell them.
Sometimes the actual price of the share deviates too far from the fair market value of the same. This usually happens when traders manipulate the prices to earn profits through speculative activities.
While these traders benefit from speculations, they form a minority of the demographic engaged in the stock market of the country. The vast majority of the people engaged in the stock markets are retail investors. These investors’ capitals get exposed to risks if the prices move too erratically which can bring about market volatility if left unchecked.
Thus, ASM is a flagging mechanism that marks such shares whose prices might have moved too erratically, possibly as a result of suspected speculative activity. If a share gets put on the ASM list, certain limitations are also put on it to curb any more speculations and price volatility.
Why does the ASM List Exist?
Now, if you’ve been reading our blogs you must have come across one about circuit breakers in the stock market. These are also safeguards that aim to avoid irregular price movement resulting from speculations. So don’t these circuit breakers make the ASM redundant?
The circuit breakers are triggered when levels that are extremely high or low for specific stocks or the entire market get hit. As a result, trading in the specific stock or the entire market is halted for predefined periods. Sometimes the trading halt can last for the rest of the trading day.
Circuit breakers halt trading altogether, and that is an appropriate response for the extreme price movement. But there is still a lot of room for unstable movement between these two extreme points. The ASM seeks to keep investors’ interests safe during this instability.
Stocks that get shortlisted into the ASM list act as a sign to alert investors of unstable price movement. There are also some trading limitations that are put on the stocks that make it to the ASM list. These limitations intend to stop any further speculations.
So while the circuit breakers are corrective measures and disciplinary actions that act after extreme price fluctuations, ASM is a preventive measure and an alert that aims to stop price fluctuations before they get out of hand.
ASM Shortlisting Parameters
On the fulfilment of the following criteria, a share is out on the ASM list.
If the high-low price variation is 200 per cent or more within the last three months and if the concentration of top 25 clients in the last three months has been 30 per cent or more.
If the high-low price variation is 200 per cent or more within the last three months and the number of price band hits for the same period has been 30 per cent or more.
If close-to-close price variation for the last 30 trading days has been 100 per cent or more, the PE is negative or more than 30 and the concentration of top 25 clients in the last month has been 30 per cent or more.
If close-to-close price variation in the last 365 days has been greater than 100 per cent. If the high-low variation in the last 365 days has been more than 200 per cent, the market cap has been above Rs 500 crore and the high-low variation in the last 90 trading days has been greater than 50 per cent.
If close-to-close price variation has been greater than or equal to 50 per cent in the last three months, the concentration of top 25 clients in a quarter has been greater than or equal to 50 per cent and five or more clients out of the top 25 clients had 50 per cent or more of their trading activity in scrip and the market-cap is above Rs 500 crore.
The following securities are excluded from the process of shortlisting under ASM:
Shares of Public Sector Enterprises and Banks
Securities already under GSM
Securities that are underlying assets to derivatives
Securities already in the “trade for trade” segment.
What happens when a share enters the ASM list?
As mentioned before, stocks that enter the ASM list, have certain restrictions put on them. The following procedure is applied to these stocks.
The entry of the stock in the ASM list is disclosed in advance. The day on which this disclosure is made is called the T-day. From the day after the disclosure, a 5% price band is imposed on the stock. This means that the price of the stock can rise or fall by only 5% of the closing price of the previous trading day.
From T+5 days, a 100% margin is applied to the stock. Margin trading is effectively disabled as a result of this restriction. This is because margin trading usually allows traders to buy or sell stocks at 35%-40% of its actual price.
Ex. If shares of company X enter the ASM on Monday 21/03/2022. The 5% price band will apply on Tuesday 22/03/2022. The 100% margin requirement will be applied on 28/03/2022 since the markets remain closed on Saturdays and Sundays.
As mentioned above, an entry into the ASM list is not a matter of severe consequence. It is not a disciplinary action that is taken as a result of a fault committed by the company. It is only an alert, intended to notify the market participants to perform sufficient due diligence when dealing with these specific stocks.
Most of the “bigger” investors even believe that if the stocks in question are the ones that survive the investor's appetite and “circle of competence”, there isn’t much to worry about. This is so because the business itself is not responsible for the price misbehaviour, it’s the market moving the prices.
What would you do if shares from your portfolio entered the ASM list? Would you invest in stocks already on the list? Tell us in the comments below. Until then, happy investing.