Trade Volume Advertising

An advertisement claiming a firm's own volume is not a separate rule. It is governed by the publication of transactions and quotations rule, because a communication that counts the firm's trades purports to report those transactions.

What Does the Publication Rule Cover?

The rule binds the member, and it reaches anything the member publishes or circulates, or causes to be published or circulated. The list of media is broad and stated in full:

• A notice
• A circular
• An advertisement
• A newspaper article
• An investment service
• A communication of any kind

Two branches follow. The first covers a communication that purports to report any transaction as a purchase or sale of any security. The second covers one that purports to quote the bid price or asked price for any security.

Exam Tip: Gotchas

• Causing publication is inside the rule. A firm that feeds figures to someone else who publishes them has caused them to be published or circulated, which the rule treats the same as publishing them itself.
• The media list ends with a catch-all. Communication of any kind closes the list, so an answer that turns on the format of the communication is answering the wrong question.

What Standard Applies to a Published Transaction Report?

Under the rule itself, a member may not publish a communication purporting to report a transaction unless the member believes that the transaction was a bona fide purchase or sale of that security.

The supplementary material adds a second, differently worded standard. It is deemed inconsistent with the standards of commercial honor rule, the manipulative and deceptive devices rule, and the publication of transactions and quotations rule for a member to publish or circulate, or cause to be published or circulated, by any means whatsoever, any report of any securities transaction or of any purchase or sale of any security.

That is so unless the member knows or has reason to believe that the transaction was a bona fide transaction, purchase or sale.

Exam Tip: Gotchas

• Three rules are named, not one. Both supplementary material branches name the standards of commercial honor rule and the manipulative and deceptive devices rule alongside the publication rule, so a false transaction report and a quotation published without reasonable cause each offend all three.
• "Knows or has reason to believe" is not the same as actual knowledge. A firm that had reason to believe a print was not bona fide is inside the supplementary material even if nobody there knew.

What Standard Applies to a Published Quotation?

Under the rule itself, a member may not publish or circulate, or cause to be published or circulated, a communication purporting to quote the bid price or asked price for any security unless the member believes that the quotation represents a bona fide bid for, or offer of, that security.

For quotations the supplementary material sets a reasonable cause to believe standard, and it has three limbs joined by "and". A member must have reasonable cause to believe the quotation:

• Is a bona fide quotation;
• Is not fictitious; and
• Is not published or circulated, or caused to be published or circulated, for any fraudulent, deceptive or manipulative purpose.

This branch binds a member that, for itself or for any other person, publishes or circulates, or causes to be published or circulated, by any means whatsoever, a quotation.

It also names the same three rules as the transaction-report branch. Publishing a quotation without that reasonable cause is deemed inconsistent with the standards of commercial honor rule, the manipulative and deceptive devices rule and the publication of transactions and quotations rule.

Exam Tip: Gotchas

• An honestly believed quotation can still fail the standard. The purpose limb is separate from the bona fide limb, so a real quotation circulated for a manipulative purpose breaches the supplementary material on its own.
• The quotation branch reaches quoting on behalf of someone else. The words "for itself or for any other person" put a member publishing another party's quotation squarely inside the rule.

What Counts as a Quotation Under This Rule?

For the purposes of this rule, the term quotation includes any bid or offer or any formula, such as "bid wanted" or "offer wanted", designed to induce any person to make or submit any bid or offer.

An unpriced solicitation therefore counts. Nothing about the definition requires a price.

Exam Tip: Gotchas

• A price is not what makes something a quotation here. A bid wanted carries no price and is still a quotation, because the definition reaches any formula designed to induce a bid or offer.

How Does the Rule Reach Trade Volume Advertising?

An advertisement reporting a member's own trading purports to report transactions, so it falls inside the first branch of the rule. Every transaction counted in that advertisement must be one the member believes was a bona fide purchase or sale, and, under the supplementary material, one the member knows or has reason to believe was bona fide.

The rules set no numeric standard for volume advertising. There is no permitted margin of error and no de minimis figure; the test is the bona fide standard applied to the transactions being counted.

Two related pieces of the same rule sit elsewhere. The treatment of self-trades, and the prohibition on disruptive quoting and trading activity, are covered in the unit on identifying and avoiding prohibited activities.

Exam Tip: Gotchas

• There is no advertised-volume threshold to memorize. The rule supplies a belief standard about the underlying transactions, not a percentage or a tolerance.
• Counting a print the member does not believe was bona fide inflates volume and breaches the rule at the same time. The defect is in the transaction included, not in the arithmetic of the advertisement.

What Should You Check on Exam Day?

• Ask whether the communication purports to report a transaction or to quote a price; the two branches carry differently worded standards.
• For a transaction report, apply belief under the rule and knows or has reason to believe under the supplementary material.
• For a quotation, apply belief under the rule, then test all three limbs, and remember the manipulative-purpose limb stands alone.
• Treat a bid wanted or offer wanted as a quotation; the definition covers any formula designed to induce a bid or offer.
• On a volume advertisement, check the transactions counted rather than looking for a numeric standard the rules do not set.