What springs to mind when you think of the stock market? Most people associate it with pictures of Wall Street and the frantic cell phone activity of traders in suits. But a lot of individuals aren’t aware that the stock market is purely a digital experience. When you purchase or sell stocks, your order is matched with another person who has the same goal. This operation is carried out by an exchange matching engine. So what precisely is a trade matching engine? And how does it operate? Let’s have a closer look.
What Is a Trade Matching Engine?
An algorithm that matches buy and sell orders for stocks, foreign exchange, cryptocurrencies, or other assets is known as a trade matching engine. Whether it’s a stock exchange, a cryptocurrency exchange, or any other kind of market, it can be argued that it is the center of any exchange. The task of locating a buyer for each seller and a seller for each buyer is the responsibility of the trade matching engine. To achieve this, it keeps an order book, which is a record of all buy and sell orders ever made.
The trade matching engine will search for another order that it can match when a new order is received. If no match is found, the order will be placed in the order book and held there until another order is placed that can be matched with it.
A Trade Matching Engine’s Operation
To match orders, the trade matching engine employs a variety of algorithms. The most used algorithm is called First In First Out (FIFO). The initial buy order and the first sale order are matched by this algorithm. The trade matching engine will match the first purchase order with the first sell order and the second buy order with the second sell order if there are three buy orders and two sell orders. Until a new sell order is received, the third buy order will stay in the order book.
Other algorithms that are sometimes used include:
– Based on the quantity of the security being exchanged, the Pro-Rata algorithm matches orders. The trade matching engine will match the first purchase order with the sale order if there are two buy orders totaling 100 shares of the XYZ stock and one sell order totaling 100 shares. The second buy order will stay in the order book.
– The Price/Time algorithm matches orders by prioritizing price over time initially. The trade matching engine will match the first sell order with the purchase order if there are two sell orders for XYZ stock at $10 per share and one buy order at the same price. The order book will still contain the second sell order.
– The Time/Price algorithm compares orders by prioritizing time over price. The trade matching engine will thus match the first sell order with the first purchase order if there are two sell orders for XYZ stock at $10 per share and one buy order at $9 per share. Regardless of price, the second sell order will be kept in the book and matched with the next purchase order.
The exchange or market determines which algorithm is employed. While some exchanges utilize a single algorithm for all deals, others let traders select the algorithm they want to use.
The Importance of a Trade Matching Engine
Trade matching engine can match orders considerably more quickly and precisely. A trade matching engine is crucial because it enables direct commerce between buyers and sellers. Furthermore, it guarantees that every deal is carried out at the most competitive price. Without trade matching technologies, every deal would need to be manually matched by a person. This would be time-consuming and prone to human mistake.
Let’s imagine, for illustration, that you wish to purchase ABC Corporation stock. You give your broker an order to purchase 100 shares at a price of $10 each. The broker then transmits this order to the trading platform for ABC Corporation. The exchange’s trade matching engine searches for a sell order that corresponds to your purchase order. It locates and matches your buy order with a sell order for 100 shares at $9 per share. Shares are purchased for $9 each, and the seller receives $10 for each share.
The deal is then executed, and a modest charge is collected by the trade matching engine. Without a trade matching engine, finding a buyer for your shares manually would take a lot of time, and you could end up paying more or less than you intended to.
Every exchange’s trade matching engine is essential since it enables speedy and effective deal execution. Making sure that every transaction is carried out at the most competitive pricing is also critical.
Because it offers liquidity, a trade matching engine is also a key factor in Forex trading . When an asset is liquid, it may be bought or sold without having to worry about finding a buyer or a seller. If there are no buyers or sellers, the asset is not liquid. A trade matching engine makes sure that there is always a buyer or seller for an asset, regardless of the price. As a result, traders find it simpler to acquire and sell assets, and the markets become more stable.
How Swiftly Must a Trade Matching Engine Be?
A trade matching engine’s speed is expressed in milliseconds (ms). One thousandth of a second is one millisecond. An exchange can match 10,000 orders per second if it can do so in 100 milliseconds.
Some exchanges have a 100 millisecond order matching time limit. Order matching on the Turquoise platform of the London Stock Exchange takes just 50 milliseconds. The NYSE Arca platform of the New York Stock Exchange can match orders in 300 milliseconds. The INET infrastructure at Nasdaq can match orders in about 100 milliseconds.
The quantity of deals that may be executed on an exchange depends on how quickly a trade-matching engine matches orders. More transactions can be executed the faster the engine is. Additionally, the market is more liquid the more deals that may be done. In a liquid market, orders may be filled swiftly and fairly and there are always buyers and sellers.
What Other Elements Make Up a Strong Trade Matching Engine?
The essential components of a trade matching engine depend on what the user requires. However, the majority of trade matching engines require a few basic elements to function.
Speed is the first essential quality. Order matching must be done promptly and effectively via a trade matching engine. The market is more liquid and more deals may be done while the engine is running quicker.
Accuracy is the second essential component. The trade matching engine must be able to precisely match orders. Trades may be conducted at the incorrect price or not at all if there are mistakes in the matching process.
Flexibility is the third essential quality. Different order types need to be supported by the trade matching engine. Orders for various asset classes, sizes, and price ranges are included.
Reliability is the fourth essential quality. The trade matching engine must always be operational. Additionally, it must be capable of processing several orders without making mistakes.
Security is the sixth essential component. Hacking and other online risks must not be allowed to access the trade matching engine. Strong data protection measures should be in place as well.
Every exchange relies on a trade matching engine, therefore it’s crucial to pick one that has the capabilities you want.A good trade matching engine needs to be quick, precise, adaptable, trustworthy, and secure.To make sure you obtain the greatest possible product, take into account all of these variables when selecting a trade matching engine.The earlier system of human traders looking for counterparties for their deals is outclassed by such matching systems.So your transactions may be conducted fast and effectively if you use the appropriate trade matching engine.