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Order matching system

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An electronic order matching system matches buy and sell orders for a security on a stock market, a commodity on commodity market or matching other types of electronically traded financial instruments such as futures contracts.

Electronic order matching was introduced in the early 1980s in the United States to supplement open outcry trading (for example the then Mid West Stock Exchange (now the Chicago Stock Exchange) launched the "MAX system, becoming one of the first stock exchanges to provide fully automated order execution" in 1982).[1][2]

Large limit orders can be "front-run" by "penny jumping". For example, if a buy limit order for 100,000 shares for $1.00 is announced to the market, many traders may seek to buy for $1.01. If the market price increases after their purchases, they will get the full amount of the price increase. However, if the market price decreases, they will likely be able to sell to the limit order trader, for only a one cent loss. This type of trading is probably not illegal, and in any case, a law against it would be very difficult to enforce.[3]

Orders are usually entered by members of an exchange and executed by a central system that belongs to the exchange. The algorithm that is used to match orders varies from system to system.[4]

In modern trading, the order matching system and implied order system or Implication engine is often part of a larger electronic trading system which will usually include a settlement system and a central securities depository. These services may or may not be provided by the organisation that provides the order matching system.

The matching algorithms decides the efficiency and the robustness of the order matching system, one for each of the states of the market:

  • Continuous trading
  • Auction

There's quite a variety of algorithms for auction trading, which is used before the market opens, on market close etc. but most of the time, the markets do continuous trading.

The trading mechanism on today’s electronic exchanges is an important component that has a great impact on the efficiency and liquidity of financial markets. The choice of matching algorithm is an important part of the trading mechanism. The most common matching algorithms are the Pro-Rata and Price/Time algorithms.

Comparison of Price/Time and Pro-Rata Following are few basic remarks about the two basic algorithms and their comparison. [5]

Price/Time algorithm:

  • Motivates to narrow the spread, since by narrowing the spread the limit order is the first in the order queue.
  • Discourages other orders to join the queue since a limit order that joins the queue is the last.
  • Might be computationally more demanding than Pro-Rata. The reason is that market participants might want to place more small orders in different positions in the order queue, and also tend to “flood” the market, i.e., place limit order in the depth of the market in order to stay in the queue.

Pro-Rata algorithm:

  • Motivates other orders to join the queue with large limit orders. As a consequence, the cumulative quoted volume at the best price is relatively large.
  • Does not motivate to narrow the spread in the natural way. This weakness is partially offset by introducing the time priority element for the first order that makes a new price.

See alsoEdit


  1. ^ "History:Chicago Stock Exchange Historical Timeline". Retrieved November 2015. Check date values in: |accessdate= (help)
  2. ^ Commodity Exchange Act Cea: Issues Related to the Regulation of Electronic Trading by Thomas J. McCool, Cecile O. Trop 2000 ISBN 0-7567-0329-8 page 18
  3. ^ Harris, Larry (24 October 2002). Trading and Exchanges (First ed.). New York: Oxford University Press. ISBN 0-19-514470-8.
  4. ^ "Matching Algorithms". CME Group. Retrieved November 2015. Check date values in: |accessdate= (help); External link in |publisher= (help)
  5. ^ (PDF) Retrieved 2018-12-14. Missing or empty |title= (help)