NISM Series XI · Unit 8 of 9 · about 6% of the paper
Market surveillance: NISM Series XI notes and practice questions
How exchanges and brokers detect and deter market abuse.
What to know in Unit 8
- Types of abuse.
- Surveillance measures.
- Broker's duties.
Key terms, examples and exam traps
Market manipulation
Market manipulation is any activity that artificially moves prices or volumes, such as rigging or spreading false news.
Example. A group trades among themselves to inflate a stock's volume.
Exam trap. This statement is false: Market manipulation is legal if the trades are small.
Pump and dump
In a pump and dump, promoters inflate a stock's price with hype, then sell to the public at the high.
Example. A stock is promoted by misleading messages before insiders sell.
Exam trap. This statement is false: A pump and dump is a legitimate strategy.
Front running
Front running is trading ahead of a client's large order to profit from the expected price impact.
Example. A dealer buys for himself before executing a client's big buy order.
Exam trap. This statement is false: Front running is permitted if the client is not harmed.
Surveillance alerts
Exchanges and brokers generate alerts on unusual price, volume, client concentration or order patterns.
Example. A system flags a sudden surge in a stock's volume.
Exam trap. This statement is false: Surveillance covers only derivatives.
Graded surveillance measure
GSM places stocks with a mismatch between price and fundamentals in graded stages with restrictions on trading.
Example. A stock whose price is far above earnings is placed in a restricted stage.
Exam trap. This statement is false: GSM is a reward for strong stocks.
Reporting obligations
Brokers must report suspicious trades and clients to the exchange and regulators and keep records of alerts and actions.
Example. A broker flags a series of suspicious trades to the exchange.
Exam trap. This statement is false: Brokers need not report anything about client trades.
Penalties for abuse
SEBI can impose monetary penalties, bar participants from the market and prosecute those involved in abuse.
Example. A manipulator is barred and fined.
Exam trap. This statement is false: Market abuse carries no penalty.
Know your client and surveillance
KYC details help the broker spot clients whose trading pattern does not match their declared profile.
Example. A student with a small income suddenly trades large amounts.
Exam trap. This statement is false: KYC has no role in surveillance.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Front running”?
- If an issue is oversubscribed, allotment is made proportionately or by lottery in the retail category, so some applicants may get nothing.
- Dematerialisation converts paper certificates into electronic form, making trading and transfer faster and safer.
- The settlement guarantee fund is a pool maintained by the clearing corporation to complete settlement when a member defaults.
- Front running is trading ahead of a client's large order to profit from the expected price impact.
Q2. Which statement best describes “Surveillance alerts”?
- Exchanges and brokers generate alerts on unusual price, volume, client concentration or order patterns.
- Participants include retail investors, high-net-worth individuals, mutual funds, FPIs, banks and insurers.
- Disputes between clients and brokers can be referred to the exchange's arbitration mechanism within the prescribed period.
- Accounts with no activity for a defined period are marked dormant and need re-verification before use.
Q3. Which statement best describes “Graded surveillance measure”?
- GSM places stocks with a mismatch between price and fundamentals in graded stages with restrictions on trading.
- Front running is trading ahead of a client's large order to profit from the expected price impact.
- In the equity cash segment the market lot is one share, so investors can trade any quantity.
- The index P/E divides the index's total market value by total earnings and shows whether the market is richly valued.
Q4. Which term is described here? Brokers must report suspicious trades and clients to the exchange and regulators and keep records of alerts and actions.
- Reporting obligations
- Auction
- FPI and DII flows
- Client registration form
Q5. Which term is described here? Market manipulation is any activity that artificially moves prices or volumes, such as rigging or spreading false news.
- Price band
- Novation
- Market manipulation
- Sectoral and broad indices
Q6. Which term is described here? SEBI can impose monetary penalties, bar participants from the market and prosecute those involved in abuse.
- Fraudulent and unfair trade practices
- Mark-to-market margin
- Unauthorised trading
- Penalties for abuse
Frequently asked questions
How much of NISM Series XI comes from Unit 8?
Unit 8 (Market surveillance) usually carries about 6% of the questions. The whole exam has 100 questions and the pass mark is 50%.
What should I study in NISM Series XI Unit 8?
Types of abuse. Surveillance measures. Broker's duties.
Are these NISM Series XI practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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