There are two order types: client and non-client. Client orders come first to avoid conflicts, while non-client orders are for the firm itself, labeled accordingly.
Basics
A non-client order, also known as a "professional order," is placed by a participant firm on exchange for itself, a partner, officer, director, or employee. These firms, also called member firms, can trade on exchanges but are typically barred from trading certain securities simultaneously with clients to prevent conflicts of interest. Client orders, in contrast, are also known as "customer orders."
Key Aspects of Non-Client Orders
In finance, non-client orders refer to orders for brokerage firms or investment companies, not orders placed by clients. However, orders placed by clients for the same things take priority. When orders for trading securities go to an exchange, they're labeled for the type of client. Brokers serve clients first, making sure their orders are completed before the firm's own trading. If the firm trades for itself, it's a non-client order. These are labeled "N-C", "N", or "Emp" depending on the exchange, showing they're not for clients.
When brokers directly buy or sell to clients, it's marked accordingly. Putting client orders ahead of non-client ones is crucial. It stops problems like trading ahead of others and other market issues. Now, with electronic trading and instant prices, firms can wait for clients' orders before doing their own. This is simpler than before when orders took time. Still, this process stops unfair trading.
Broker Responsibilities
When a client gives a broker an order to buy a certain amount of shares in a company, and the broker also wants to make a similar purchase for themselves, the rule is clear: the broker must complete the client's order first before dealing with their own.
Pricing Fairness
Fairness dictates that the client should benefit from the best available prices, even if multiple price levels are involved in executing both the client's and the broker's orders. In simpler terms, the broker shouldn't deliberately secure a better price for themselves while leaving the client with a less favorable one.
Electronic Trading
With the advent of electronic trading, market orders can be filled nearly instantaneously, allowing clients to quickly place and execute trades. This control lets clients choose the timing and conditions of their trades. As a result, the practice of brokers manually handling client orders has diminished, but it's essential to note that engaging in front running – trading before clients – remains against the rules.
Example of Non-Client Order
Suppose a market maker receives an order from a client to buy 100 shares of Microsoft stock at $300 per share. The market maker may decide to buy 1,000 shares of Microsoft stock for its own account, to sell the 100 shares to the client at $300. The market maker may also decide to hold the remaining 900 shares in the hopes of selling them at a higher price. This type of transaction is a non-client order and must be reported as such.
Conclusion
Non-client orders are an essential part of the trading ecosystem, allowing firms to trade for themselves while also serving their clients. However, these orders must be labeled appropriately to ensure fairness and transparency. Firms must always put their clients' interests first and avoid any conflicts of interest.