Anyone who interacts with the Indian stock market knows that the nature of the market includes volatility in terms of rapid price swings, sudden changes in trading volume, and guided market manipulation at times. To assist in ensuring fairness and the protection of investor interests, the Securities and Exchange Board of India (SEBI) has established two fairly rigorous monitoring frameworks that all brokers must understand: ASM (Additional Surveillance Measure) and LTASM (Long-Term ASM). 

Both systems act as preemptive safety measures, capturing problematic stocks before the stocks have the chance to disrupt the market. To give a brief description, ASM refers to flagged short-term volatility, and LTASM comprises stocks that continue to have a persistent long-term risk based on poor governance, or otherwise. Let us explore how the watchlists work together, why it is important, and most importantly, how brokers can remain compliant and sleep easy.

What are ASM and LTASM? (AIDA: Attention, Interest, Desire, Action)

Indian markets are often volatile, but some stocks are more extreme in their price shifts or trading volume spikes, at times reflecting a degree of instability or manipulated behaviours. SEBI offered to regulate this situation with ASM (in 2018) that operates as a pre-emptive regulatory filter (akin to a 'circuit breaker') for stocks with erratic behaviour.

• ASM (Additional Surveillance Measure) is a regulatory filter to study and impact stocks with unusual short-term volatility; ASM stock will therefore have additional criteria for trading, and a higher margin for a period of 5 - 15 days. 

• LTASM (Long-Term ASM) will apply to some stocks, where there are continual risk factors; for example, continual wild shifts in price or repeated governance issues. Surveillance would be more intense and for longer, with increasing restrictions. 

For brokers, these are not obscure regimes or obstacles to their business, but disciplines with respect to their responsibilities in fostering profitable and regulated markets, while protecting the retail and institutional investors.

How Does SEBI Determine Which Stocks are on These Lists?

SEBI, along with the exchanges, employs specific quantitative and qualitative measures to find stocks that need a closer look. Before we start breaking down the details, it is important to note that what is being prioritized is the health of the market: the actions taken here emphasize safety for investors rather than preventative measures. 

Some key indicators include:

• Large Price Movements: A stock could see price changes of 150% or more over a consecutive 3 month, or 100%+ movement over a rolling year.

• High Client Concentration: If the top 25 clients account for greater than 30% of trade volume, this is possible manipulation of the market.

• Market Capitalization Check: this typically tends to be defined as a stock with a market cap above ₹500 crore.

• Diversity of Participation: A low number of traders (based on PAN numbers) would indicate not much diversity in trades, which means the trader activity would be more centralized, which can mean risky movement.

In combination, these indicators illustrate the behaviors of the market and will help provide SEBI identifiable stocks if the stock in question shows either short-term or long-term risks. Stocks identified by these simplistic thresholds are named in the vigilance list and adjusted to surveillance with ongoing restrictions and scrutiny. 

In conclusion, the mechanism of awareness of capricious or suspicious activity to ensure market identification is at the forefront of maintenance of safeguards for all participants.

What Restrictions Are Imposed Under ASM and LTASM?

Whenever a stock is placed on one of the surveillance lists, SEBI imposes a series of escalating restrictions intended to limit risk while discouraging speculation or manipulation:

ASM (Short-Term Watch)

• Stage 1: Requires 100% margin - making speculation expensive.

• Stage 2: Requires 100% margin and has tighter price bands (typically 5%) to limit volatile price movements.

LTASM (Long-Term Watch)

LTASM works through four levels of escalation.

• Stage 1: 100% margin.

• Stage 2: The price bands become tighter and price movements are only allowed within the daily price movement limitation.

• Stage 3: 100% margin, and stricter price bands.

• Stage 4: Only trades can settle on a gross basis, must have a 5% price band - it makes it impossible to engage in (long or short) leveraged or speculative trades.

The stocks are reviewed at least every 90 days, allowing periodic adjustments within the confines of trading volume, recent trading history and material information disclosures.

What Does This Mean for Brokers? 

In practical terms, being on these watchlists means brokers will need to adapt very quickly, in terms of operations and compliance: 

• Increased Margin Requirements: Clients can no longer leverage positions to the extent they had before, which decreases risk exposure.

• Reduced Liquidity: Many investors won't trade stocks that are under ASM or LTASM (and other stages), ultimately impacting trading volume.

• Compliance Burden: Regular reviews, monitoring sold short flagged stocks, and tracking hijinks to report to ASIC within 48 hours under Regulation 18G, having a 48-hour window of notification will expose brokers to penalties and liability.

• Surveillance Obligations: Increased surveillance duties are not limited to "discretionary" based, but means actionable alerts, frequent data audits, and reporting to Regulators.

How to Stay Compliant (and Sane)

Many rules are barely long enough to review, let alone comply with them, which means that brokers need to solve problems in systemic ways rather than manual checks:

• Automate Surveillance: n.Prime, or similar platforms can track flagged stocks in real time, auto alert for risk, and streamline compliance workflows, and have made oversight 10X more efficient because of reduced manual error and time to respond.

•  Ongoing Staff Training: Continual staff training helps all staff units stay on point with the latest ASM/LTASM rule/briefing to minimize expensive mistakes.

• Solid Technology Stack: A modern technology stack allows brokers to remain in sync with ongoing SEBI review processes and can automate SEBI review responses.

• Consistent Documentation: Consistent documentation, detailed compliance practices, and regular reviews saves time, effort and headaches. Most brokers can afford to be audit-ready.

How n.Prime simplifies LTASM compliance

With deadlines, audits, and margin requirements piling up, n.Prime is a digital safety blanket:

• Instant Alerts for Risks and Rule Changes: Brokers receive a notification the moment there is unusual activity, avoiding the risk of missing a regulatory curveball.

• Automated Reporting: Compliance reports are produced in record time, reducing time lost in reporting and manual tasks.

• Live Margin & Price Band Management: Brokers can move immediately to decrease risk controls, as SEBI updates the rules, so no more slips and no more client complaints. 

• Audit Proof Documentation: All your compliance activity is logged, summarised, and ready for SEBI's findings.

Takeaway

ASM and LTASM are not hurdles; they are important safety nets. Wise brokers recognise these frameworks as the opportunity to empower their operations to protect their clients and, ultimately, build trust. Brokers can reduce risk, remain up to date with SEBI’s ongoing changes related to compliance and regulation, and focus on what counts - strengthening their businesses and serving their clients by leveraging technology and next-gen platforms like n.Prime and prioritising exceptional internal controls.

When compliance becomes too overwhelming for brokers, they should consult the experts who understand areas of compliance and, of course, practical platforms like n.Prime. With the right support, brokers can execute trades with confidence and compliance, even amid unexpected market conditions.

Summary

SEBI’s ASM and LTASM systems are at the heart of market surveillance in India and act as early-warning systems for stocks that are exhibiting signs of excessive volatility, manipulation, or poor governance. The ASM system focuses on stocks with short-term risks and has temporary margins and trading restrictions. LTASM system focuses on stocks with long-term issues with governance, starts less and ends up with the heaviest in terms of controls, and there is a significant onboarding process in four stages. For brokers, being on the watch lists means increased monitoring, timeframes for reporting, and enables meaningful technology to support monitoring for the investor or clients that the brokers service, where their names or stock values might be listed on ASM or LTASM. Automated solutions where brokers (like n.Prime) monitor risk in real time, can willingly trigger on individual audits, and can take away compliance burden to allow brokers to focus on planning and compliance, Regulatory compliance in particular, in terms of AML and KYC, allows brokers to service the regulated activity with confidence. To ensure fairness, stability and to allow the Indian stock market to function in a sustainable manner, SEBI initiates its ASM and LTASM systems, which are ultimately protective systems.