Part 5: Market Surveillance | CSL Module 4

5.1 Exchange Surveillance Systems

Stock exchanges operate sophisticated surveillance systems to detect market manipulation, insider trading, and other violations. Surveillance is a first-line defense for market integrity, with findings escalated to SEBI for enforcement action.

Surveillance Framework

Exchange Level: Real-time monitoring by NSE/BSE surveillance departments
SEBI Level: Integrated Market Surveillance System (IMSS) across exchanges
Data Sharing: Exchanges share data with SEBI; cross-market surveillance
Technology: AI/ML-based pattern detection, alert systems

Types of Surveillance

Type	Focus	Methodology
Real-time	Live market monitoring	Price/volume alerts, circuit triggers
Post-trade	Pattern analysis	Data mining, statistical analysis
Intelligence-based	Tip-offs, complaints	Investigation of specific leads
Cross-market	Multi-exchange patterns	Correlating activity across NSE/BSE

★Integrated Market Surveillance System (IMSS)

SEBI's IMSS collects trade data from all exchanges, depositories, and other market infrastructure. It enables detection of manipulation across markets - for example, building positions in cash market at one exchange and derivatives at another.

Surveillance Alerts

Systems generate alerts for various patterns including:

Price Alerts: Unusual price movement relative to index/sector
Volume Alerts: Abnormal trading volume spikes
Concentration Alerts: Large positions by single entity/connected group
Order-to-Trade Ratio: Excessive order modifications/cancellations
Spoofing Detection: Layered orders creating false impression

⚖Defence Consideration

When representing clients in surveillance-triggered investigations: (1) Obtain complete alert details from exchange, (2) Analyze trading pattern with expert assistance, (3) Identify legitimate business reasons, (4) Check for technical/system glitches, (5) Review internal compliance records.

5.2 Unusual Activity Monitoring

Exchanges monitor securities showing unusual price or volume activity and take preventive measures to protect market integrity and uninformed investors.

Additional Surveillance Measures (ASM)

Securities showing unusual activity may be placed under ASM framework:

Stage	Criteria (illustrative)	Action
Stage I	High volatility, price variation	100% margin; no intraday leverage
Stage II	Continued unusual activity	100% margin; trade-to-trade settlement
Stage III	Severe abnormality	Reduced price band (5%); trade-to-trade
Stage IV	Extreme cases	2% price band; trade-to-trade

Graded Surveillance Measure (GSM)

★GSM Framework

GSM applies to securities with surveillance concerns based on financial parameters. Stages range from GSM Stage I (warning, enhanced margin) to GSM Stage VI (trading only once a week). Securities can exit GSM by meeting compliance criteria.

GSM Criteria Include:

Financial Health: Negative net worth, erosion of capital
Compliance: Non-submission of financial results
Promoter Holding: Very low/encumbered promoter stake
Price-Earnings: Extremely high P/E without justification
Trading Pattern: Concentrated trading, price manipulation concerns

Trade-to-Trade Settlement

Trade-to-Trade (T-segment)

Securities in T-segment must be compulsorily delivered - no intraday squaring off permitted. Buyer must take delivery; seller must give delivery. This prevents speculative trading and is used as a surveillance measure.

!Impact on Trading

ASM/GSM measures significantly impact liquidity and trading activity. Clients holding such securities face: (1) Higher margin requirements, (2) No leverage/intraday, (3) Reduced price bands, (4) Mandatory delivery. Advise proactive exit before severe stages.

5.3 Position Limits

Position limits restrict the maximum positions that can be held by market participants to prevent excessive concentration, reduce systemic risk, and curb manipulation. Different limits apply for different participant categories.

Derivatives Position Limits

Category	Index Futures/Options	Stock Futures/Options
Client Level	Higher of Rs. 500 crores or 15% of OI	Higher of 1% of free float or Rs. 50 crores
Trading Member	Higher of Rs. 1000 crores or 15% of OI	Higher of 5% of OI or Rs. 250 crores
FPIs (Category I)	Higher of Rs. 1000 crores or 15% of OI	20% of MWPL per exchange
Market Wide (MWPL)	N/A	20% of free float capital

Market Wide Position Limit (MWPL)

When MWPL reaches 95%, the following restrictions apply:

New Position Ban: Fresh positions not allowed in futures and options
Existing Positions: Can be squared off or reduced only
Exit: Ban lifted when MWPL falls below 80%
Penalty: Violation attracts exchange penalties

★Position Reporting

Large position holders must be reported by brokers to the exchange. Exchanges monitor concentration and can call for additional disclosures. Connected persons' positions are aggregated for limit calculations.

Cash Market Position Limits

SEBI Takeover Code: 25% triggers open offer obligation
Insider Trading: Trading window restrictions for insiders
Bulk/Block Deal: Disclosure requirements for large trades
Promoter Pledge: Disclosure and monitoring requirements

⚖Advisory Point

When advising large traders or institutions: (1) Monitor position limits daily, (2) Plan position building to avoid breaches, (3) Consider connected person aggregation, (4) Maintain records justifying positions, (5) Report large positions proactively.

5.4 Short Selling Framework

Short selling is permitted in India subject to regulatory framework designed to prevent abusive short selling while allowing legitimate price discovery and hedging activities.

Short Selling Rules

Short Selling

Selling securities one does not own at the time of trade, with delivery obligation met through borrowing or subsequent purchase. In India, naked short selling (without arrangement to borrow) is prohibited.

Key Requirements

Disclosure: All short sales must be disclosed upfront at order entry
No Naked Shorts: Must have arrangement to borrow (SLB) before selling
Institutional Shorts: Institutional investors must report to exchange
Retail Shorts: Intraday short selling permitted; squared off by day end
Delivery: Short sales settled through SLB or auction

Securities Lending and Borrowing (SLB)

Aspect	Details
Platform	NSE SLB segment; CDSL/NSDL facilitation
Tenure	Minimum 1 day; Maximum 12 months
Eligible Securities	Securities in F&O segment
Margin	Both lender and borrower deposit margin
Settlement	T+1 for lending; T+1 for return
Early Recall	Lender can recall with notice

!Short Selling Violations

SEBI PFUTP Regulations prohibit: (1) Naked short selling, (2) Creating artificial volume through short sales, (3) Short selling with inside information, (4) Coordinated short selling to manipulate price. Violations attract severe penalties.

Short Selling Disclosure

Broker Level: Collect and maintain client short position data
Exchange Level: Aggregate short selling data published weekly
Institutional: Position-wise disclosure to exchange

5.5 Circuit Filters and Breakers

Circuit filters limit price movements for individual securities, while circuit breakers halt market-wide trading during extreme volatility. These mechanisms protect against flash crashes and provide cooling-off periods.

Price Band Categories

Band	Applicable Securities	Effect
No Price Band	F&O eligible securities	Dynamic bands apply
20%	Liquid, large-cap stocks	Trading continues within band
10%	Medium liquidity stocks	Narrower movement allowed
5%	Less liquid / surveillance	Tight control
2%	GSM/ASM securities	Severe restriction

Market-Wide Circuit Breakers (MWCB)

★MWCB Triggers

Trading halts across all exchanges when SENSEX or NIFTY 50 moves 10%, 15%, or 20% from previous close. Halt duration depends on time of trigger. At 20% movement, trading halts for remainder of day.

Upper Circuit

Price reaches maximum allowed
Only sell orders can be placed
Buyers queue without execution
Indicates strong demand
May indicate manipulation risk

Lower Circuit

Price reaches minimum allowed
Only buy orders can be placed
Sellers queue without execution
Indicates selling pressure
Liquidity trap for holders

Dynamic Price Bands

For securities without fixed circuit limits (F&O eligible):

Initial Band: +/- 10% from previous close
Relaxation: Automatic after price sustains at band for specified time
Pre-open: Separate calculation for opening price discovery
Index Derivative: No price band; MWCB applies

Operator Alert Pattern

Repeated upper circuits followed by sudden crash is a classic manipulation pattern. SEBI has acted against operators who create artificial demand through circular trading, trap retail investors, and then dump shares.

✓Client Advisory

Advise clients to be cautious of: (1) Unknown stocks hitting repeated circuits, (2) Tips promising multi-bagger returns, (3) Stocks with low float and high promoter holding, (4) Securities under ASM/GSM. Document advice for regulatory protection.