The Key Features of a Good Trade Matching Engine

What comes to your mind when thinking of the financial markets? Wall Street and trading rooms where traders can never hang up their phones? These chaotic and stressful moments are already gone. However, some people are still unaware that the stock market nowadays is an entirely digital activity. While you buy or sell stocks nowadays, your order is matched with the order of another person that wants to do the same thing. This process is handled by a technology called the exchange matching engine.

In this article, we will discuss a trade matching engine and how it functions. 

What Is a Trade Matching Engine?

A trade matching engine is a technology developed to match buy and sell orders for stocks, currency markets (Forex), cryptocurrency, and other asset classes. It is considered the core of every type of modern exchange, no matter the type of market. The trade matching engine is in charge of locating a buyer for each seller and vice versa, which is accomplished by keeping an order book that lists all buy and sell orders imposed. When a new order arrives, the trade matching engine searches for another order that can match it. In case there is no connection, the order will be placed in the order book and will be held until another order can be paired with it.

How Does a Trade Matching Engine Work?

To meet orders, the trade matching engine uses a series of complex algorithms. One of the most common is the First In First Out (FIFO) method, where the first buy order is matched with the very first sell order. In other words, when there are three buy orders and two sell orders, the trade matching engine will match the first buy order with the first sell order and the second buy order with the second sell order. The third buy order will be held in the order book before a new sell order arrives.

Below are the several different algorithms that are widely used:

The Pro-Rata algorithm matches orders depending on the number of security transfers. So, when there are two different buy orders for 100 shares of a specific stock and one sell order for 100 shares, the trade matching engine will match the first buy order with the sell order, while the second buy order will continue to stay in the order book.

The Price/Time algorithm matches orders first by price and then by time. Say there are two sell orders at $10 per share of a particular stock and one buy order at $10 per share. The trade matching engine would then match the first sell order with the buy order. The second sell order is still in the order book.

The Time/Price algorithm matches orders first by time and then by price. If there are two sell orders at $10 per share for XYZ stock and one purchase order at $9 per share, the trade matching engine will match the first sell order with the buy order. No matter the value, the second sell order will persist in the report and be paired with the next purchase order.

The technique used is determined by the exchange or market. Some exchanges allow investors to select their preferred algorithm, whereas others utilize one algorithm for all transactions.

Why is a Trade Matching Engine Important?

Trade matching engines could indeed match orders much more quickly and accurately. A trade matching engine is helpful as it helps buyers and sellers conduct business without the need for a middleman. Moreover, the engine ensures that all trades are completed at the best price possible. Each trade would have to be manually matched if it wasn’t for trade matching engines, which would take a long time and cause mistakes by human beings.

Assume you want to purchase stock in a particular corporation. You notify your broker to purchase 100 shares at $10 for every share. This order is then sent to the exchange where the broker trades with the same corporation. The exchange’s trade matching engine searches for a sell order that matches your buy order. It locates and aligns a sell order for 100 shares at $9 per share with your buy order. You pay $9 for each share, and the person selling you the shares pays $10 for each share. The trade matching engine then charges a fee to complete the deal. If there were no trade matching engine, somebody would have to find buyers for your shares on their own, which would take a long time and might lead to spending more than you intended.

Since it allows transactions to be implemented smoothly and safely, the trade matching engine is essential to every modern exchange. It is also necessary to ensure that all processes are carried out at the lowest possible cost.

Providing liquidity is yet another task of a trade matching engine. The possibility to buy or sell an asset without discovering a buyer or seller is called liquidity. Without buyers or sellers, the asset is not liquid. Even if the valuation isn’t best suited, a trade matching engine guarantees that there is always someone willing to buy or sell an asset. It thus makes things simpler for traders to buy and sell assets and increase market stability.

How Fast Does a Trade Matching Engine Need to Be?

A perfectly matched engine’s speed is calculated in milliseconds (ms), equal to one-thousandth of a second. As such, if an exchange could indeed match orders in 100 milliseconds, it can process 10,000 orders per second.

Several exchanges could match orders differently, depending on their capacities. The so-called Turquoise platform at the London Stock Exchange can match orders in as little as 50 milliseconds. The NYSE Arca platform of the New York Stock Exchange can match orders in 300 milliseconds. In addition, Nasdaq’s INET platform has the ability to match orders in 100 milliseconds.

The pace of a trade matching engine is significant since it influences the number of trades that can be formed on an exchange. The more trades that could be realized, the quicker and more efficient the engine. Also, the more trades that can be executed, the more liquid in the market appears. A liquid market is one in which there are always buyers and sellers and where orders can be filled promptly and effectively.

What Are Some of The Key Features of a Good Trade Matching Engine?

The main attributes of a trade matching engine are determined by the user requirements. However, certain essential features are required by the majority of trade matching engines.

The first unique characteristic is its rate. A trade matching engine must be capable of fulfilling match orders rapidly and effectively. The more trades that can be produced and the more liquid the market, the smoother the engine.

The second important feature is precision. The trade matching engine must be able to match orders precisely. If there are failures in the matching process, trades may be performed at the incorrect price or not at all.

The third significant attribute is adaptability. The trade matching engine must handle a wide range of order types, including orders for various asset classes, sizes, and price points.

The fourth essential feature is trustworthiness. The trade matching engine must be operational at all times. It must also be capable of handling a large number of orders without making any mistakes.

The fifth important feature is safety. Robust data security measures must be implemented no matter what. The trade matching engine must defend the system from hacking and other cyber challenges. 

Bottom line

Every advanced and modern exchange must build a trade matching engine, and selecting one with the appropriate features for your needs is vital. A good trade matching engine must be quick, precise, adaptable, dependable, and, most importantly, protected. Take into account all of these considerations when selecting a trade matching engine to make sure that you get the right product. Also, ensure that your transactions are performed efficiently and quickly using the right trade matching engine. These matching engines outperform the old-aged system of human traders looking for market participants for their trades.