What is the Nine-Bond Rule

The Nine-Bond Rule, also known as "Rule 396," is a requirement by the New York Stock Exchange (NYSE) that all orders for nine bonds or less be sent to the trading floor for one hour. In this time, it is expected that a market for such securities can be found. 


Bonds tend to trade more frequently on the over-the-counter (OTC) market and the Nine-Bond rule does not apply to orders directed to the OTC market. Because of the relative inactivity of bond trading on the NYSE (most due to several factors including many of the listed bonds being traded OTC), the Nine-Bond rule, which enables an order to stay on the floor for one full hour, was put in place to garner the best possible price for the individual investor.

The trading of bonds has never been as seamless and transparent as that of stocks, even though the U.S. fixed income market is substantially larger than the U.S. equity market. Many reasons exist for this discrepancy. Chief among them is liquidity, there is not enough daily trading activity in most bonds to facilitate such transactions through online brokerage accounts or in odd lots.

The closest equivalent to discount stock trading is the TreasuryDirect.gov website which enables individual investors to purchase Treasury securities directly from the issuing U.S. government.  

The Evolution of Bond Trading and the Nine-Bond Rule

For decades, dozens of brokerage firms and investment banks known as primary dealers maintained large inventories of bonds on their balance sheets to facilitate efficient trading. But the role of primary dealers has declined since implementation of the Volcker Rule in 2015 that prohibits federally-funded banks from trading for their own profit. Physical exchanges like the NYSE have also lost share of fixed income trading as most of the market has moved to electronic networks to buy and sell bonds. Many of these networks are utilized by agency-only brokers, who are assuming the share of fixed income trading that primary dealers were forced to give up.

The Nine-Bond rule is also necessary due to the large size of most fixed income transactions. While trade sizes have been coming down – the average trade size was $536,000 in 2014 – they will never approach the very small quantities applicable to the Nine-Bond rule.