Understanding the Nine-Bond Rule: A Key Chapter in Bond Trading History

Charlene Rhinehart is a CPA and CFE, serving as chair of an Illinois CPA Society committee. She holds a degree in accounting and finance from DePaul University.

What Was the Nine-Bond Rule?

The Nine-Bond Rule, also known as Rule 396, was a New York Stock Exchange (NYSE) mandate that required all orders of nine bonds or fewer to be posted on the trading floor for a minimum of one hour. This rule aimed to create a transparent market where investors could secure the best possible price for smaller bond orders. If an order remained unfilled after an hour, brokers could pursue execution outside the exchange, either through over-the-counter (OTC) markets or other venues.

In February 2005, the NYSE proposed abolishing the Nine-Bond Rule to improve the speed and efficiency of bond transactions without disadvantaging smaller investors. The Securities and Exchange Commission (SEC) approved this change on August 1, 2005, marking the end of the rule.

Key Insights

• The Nine-Bond Rule ensured that small bond orders were publicly displayed on the NYSE trading floor for at least an hour, helping individual investors obtain fair prices.
• Its elimination in 2005 reflected a shift toward more streamlined and efficient bond trading mechanisms.

How the Nine-Bond Rule Impacted Bond Trading

Since bonds often trade more actively in the OTC market, the Nine-Bond Rule specifically targeted NYSE transactions to protect small investors. Unlike stocks, bonds generally lack liquidity and frequent trading volume, making transparent pricing more challenging. The rule helped maintain fairness by giving orders time to attract competitive bids on the floor.

Despite the size and importance of the U.S. fixed income market—which surpasses the equity market in scale—bond trading has historically been less transparent and less accessible to retail investors. This is partly due to lower liquidity and the complexity of bond transactions compared to stock trading. For individual investors, TreasuryDirect.gov offers a direct way to buy U.S. government securities, bypassing traditional brokerage platforms.

The Changing Landscape of Bond Trading and Regulatory Impact

For many years, primary dealers—including major brokerage firms and investment banks—held extensive bond inventories to facilitate market liquidity. However, the 2015 Volcker Rule limited banks' ability to trade bonds for proprietary profits, reducing the role of these dealers.

Additionally, physical exchanges like the NYSE have seen a decline in fixed income trading volume as electronic trading platforms have taken precedence. These platforms, often operated by agency-only brokers, now handle much of the bond market activity, filling the gap left by primary dealers.

The Nine-Bond Rule was initially essential due to the typically large size of bond transactions but became less relevant as market structures evolved to embrace more efficient electronic trading solutions.

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