What is a Non-Client Order?
A non-client order is an order on an exchange made by a participant firm on behalf of itself or a partner, officer, director, or employee of the firm.
A participant firm entitled to trade on an exchange is known as a member firm. Most securities exchanges restrict a participant firm and its employees from trading in the same securities as their clients at the same time. The restriction is designed to minimize conflicts of interest—perceived or actual—that may occur when a participant firm competes with its clients for the execution of orders.
A non-client order is also known as a "professional order," and a client order may also be known as a "customer order."
- A non-client order is an order placed on behalf of the firm itself, whether it be for an employee, partner, officer, or for the firm's own trading account.
- To avoid perceived or actual conflicts of interest, customer orders take precedent over non-client orders.
- Non-client orders are designated and marked as such.
Understand the Non-Client Order
A non-client order is carried out for the benefit of a brokerage firm or investment company, rather than on behalf of one of its clients. While these orders are allowed, priority must be given to client orders for the same securities.
When orders to trade securities make their way down to an exchange, the order must be marked with the kind of client designation that will benefiting from the trade. Since a broker acts as an agent for their customers, client orders are given priority and must be executed in full before the firm can begin trading the same security for its own account.
When a firm does trade for itself, it is a non-client order and such order tickets will be marked "N-C", "N", or "Emp" depending on the exchange, indicating that the order is a non-client order.
When a broker acts as principal—that is, the broker directly buys or sells to its client taking the other side of the trade—then the trade must also be marked accordingly.
Order priority for client over non-client order flow is essential to prevent front running (trading ahead) and other principal-agent problems that can arise in securities markets.
With the advent of fully electronic trading and instantaneous price execution, a firm can simply wait for its client's order to fill before executing its own orders. This makes the process simpler than in the old days, when it could take time for orders to fill and they could pile up. Nevertheless, the process remains an integral part of the system in order to avoid front-running.
Example of a Non-Client Order
If a client submits an order to a broker to buy 1,000 shares of Apple (AAPL) and the firm also wants to buy 1,000 shares of AAPL, then the broker must first execute all of the client's order before starting to fill its own order.
Not only that, but the client should be entitled to the more favorable prices given executions at multiple price levels that fill both the client and participant firm. In other words, the broker should not be intentionally filling the client at a worse price than they fill themselves.
With electronic trading, clients place trades instantaneously, and can be filled instantly with market orders for example. This gives the client more control over when and where they get filled. Therefore, the instances of brokers physically handling clients orders has declined, yet front running is still illegal.