Matching Orders

What Are Matching Orders?

Matching orders is the process by which a securities exchange pairs at least one unsolicited buy orders to at least one sell orders to make trades. This can be diverged from [requests for a quote](/demand for-quote) (RFQ) in a security to proceed with a trade.

To buy a quantity of stock and one more needs to sell similar quantity at similar price, their orders match, and a transaction is affected. Crafted by pairing these orders is the process of order matching by which exchanges recognize buy orders, or bids, with comparing sell orders, or asks, to execute them. Throughout the last decade, this process has become primarily automated.

How Matching Orders Works

Matching the orders of buyers and sellers is the primary work of trained professionals and market makers in the exchanges. The matches happen when viable buy orders and sell orders for the equivalent security are submitted in close proximity in price and time.

Generally, a buy order and a sell order are viable in the event that the maximum price of the buy order matches or surpasses the base price of the sell order. From that point, the computerized, order-matching systems of various exchanges utilize different methods to focus on orders for matching.

Today, most exchanges match orders utilizing computer algorithms; however by and large, brokers matched orders through eye to eye cooperations on a trading floor in an open-objection auction.

Quick, accurate order matching is a critical part of an exchange. Investors, especially active investors and day traders, will search for ways of limiting shortcomings in trading from each conceivable source. A sluggish order-matching system might make buyers or sellers execute trades at not so great prices, eating into investors' profits. If some order-matching protocols will more often than not favor buyers, and others favor sellers, these methods become exploitable.

This is one of the areas where high-frequency trading (HFT) had the option to improve effectiveness. Exchanges aim to focus on trades such that benefits buyers and sellers similarly to amplify order volume — the soul of the exchange.

Well known Algorithms for Matching Orders

All major markets have changed to electronic matching. Every securities exchange utilizes its own specific algorithm to match orders. Extensively, they fall under two categories: first-in-first-out (FIFO) and pro-rata.

FIFO

Under a fundamental FIFO algorithm, or price-time-priority algorithm, the earliest active buy order at the highest price takes priority over any subsequent order costing that much, which thus takes priority over any active buy order at a lower price. For instance, on the off chance that a buy order for 200 shares of stock at $90 per share goes before an order for 50 shares of a similar stock at a similar price, the system must match the whole 200-share order to at least one sell orders before beginning to match any portion of the 50-share order.

Pro-Rata

Under an essential pro-rata algorithm, the system focuses on active orders at a specific price, proportional to the relative size of each order. For instance, in the event that both a 200-share buy order and a 50-share buy order at a similar price are active when a viable 200-share sell order shows up, the system will match 160 shares to the 200-share buy order and 40 shares to the 50-share buy order.

Since the sell order isn't adequately large to satisfy both buy orders, the system will somewhat fill both. In this case, the pro-rata matching algorithm takes care of 80 percent of each request.

Highlights

• Matching orders is the process of recognizing and affecting a trade among equivalent and inverse solicitations for a security (i.e., a buy and a sale at a similar price).
• Over the course of the last decade, this process has become as a rule automated.
• Order matching is the number of exchanges that pair buyers and sellers at viable prices for efficient and orderly trading.