Matching Engine Software: How Does it Work?

When you look at an asset’s price chart, what do you see? The simplest and most common answer you hear is “just the price”. Yes, that’s true, but what’s behind those prices? What makes prices move in one direction or another? There are many instruments and methods which help both investors-freshmen and advanced traders to analyze the market and quotations. The correlation between supply and demand is an important factor; it influences the value of exchange assets. This ratio is regulated by a system, such as an order book, which functions thanks to the heart of any exchange, the matching engine.

In this article, we will cover the question of what the order matching engine is and what role it plays in the correct functioning of an exchange. You will also learn about the peculiarities of this system. Finally, we will discuss how the order book is designed as an integral part of the matching engine software and how the order matching process works.

What is a Matching Engine And Which Role Does It Play on Exchange?

An order matching engine (or simply a matching system) is an electronic system that matches buy and sell orders for a stock exchange, commodities market, or other financial exchange. The order matching system is the core of all electronic exchanges and is used to execute orders of exchange users.

The matching mechanism acts as an order book for each individual trading pair. This is where buyers and sellers come together to complete a trade. The matching engine ensures that transactions occur quickly and efficiently, with the best price for both parties.

When prices change quickly, finding a buyer or seller willing to trade at the desired price is difficult. The role of the matching mechanism becomes even more critical in times of high market volatility. A good matching mechanism will be able to quickly match you with a counterparty so that you can execute your trade and take advantage of market conditions.

Not all exchanges have their own in-house matching engine. Some rely on third-party solutions instead. These mechanisms are designed to handle high transaction volumes and can match orders in fractions of a second. This is important for exchanges with a high volume of trading activity.

The speed at which a matching mechanism can execute trades is often referred to as its latency. A low-latency matching engine can execute trades quickly, while a high-latency engine may take several seconds or more to find a counterparty for your trade. The importance of low latency becomes apparent when you consider that prices in the markets can change quickly. If you are trying to buy or sell at a certain price, you want your transaction to go through as quickly as possible so that you don’t miss your opportunity.

Peculiarities of the Matching Engine

The performance of a matching engine is often measured by two key metrics: throughput and capacity. Throughput is a measure of how many transactions can be processed in a given period of time. Capacity measures how many orders can be stored in the order book at any given time.

A good matching engine will have high throughput and capacity so that it can process a large number of transactions without slowing down. This is especially important during periods of high market activity when many people are trying to buy and sell at the same time.

The matching mechanism is an important part of any exchange and brokerage. It is what ensures that trades are executed quickly and efficiently with the best possible price for both parties. When choosing an exchange, it is important to consider the performance of the matching mechanism so that you can trade quickly and easily.

A good matching mechanism can provide several advantages for trading. First, it can help ensure that trades are executed quickly and efficiently. Matching engine software will be able to match buy and sell orders quickly, which can help reduce the time it takes to execute a trade. This is especially important in volatile markets where prices can change rapidly.

Second, suitable matching engine software can help ensure that trades are executed at the best possible price. When you have many orders, a good matching mechanism can select the best price for each trade. This can lead to better prices for both buyers and sellers.

Third, matching mechanisms can help reduce trading costs. An exchange with good matching engine software can match orders faster and more efficiently. This can lead to lower exchange costs, which can be passed on to users through lower commissions.

Fourth, matching engine software can help increase exchange liquidity. With faster order execution, it is easier for buyers and sellers to find each other. This can lead to increasing the exchange’s liquidity.

Finally, matching engine software can help attract more users to trade. When an exchange has a good matching engine, it is more likely that users will want to trade on the exchange. This can lead to more users, more trades, more liquidity, and more profit.

Order Book As Part of Matching Engine Software 

The order book is a table of limit orders placed by bidders on the exchange floor. It shows the asset’s current price and allows predicting the movement of quotations. Each row of the table is a record that displays two parameters: order price and volume.

An order book is an essential tool that allows you to assess the mood of market participants at the current moment and, sometimes, to predict where the price will go next. Trading by the market depth is used in both trading and investments when trading low-liquid stocks.

The behavior of the asset directly depends on its sales and purchases. The stock market depth reflects this ratio. All traders use it, irrespective of whether they invest for the long-term or scalping. They use the order book to track real-time asset transactions and build their investment strategy. The first ones find essential levels in the depth of the market, at which large orders are piled up and from which it is rational to buy or sell. The latter need to react very quickly to market changes and make quick decisions on the sale or purchase of an asset.

In today’s market, investors use many instruments and ready-made strategies. The order book is one of the most universal tools for market analysis and can be used in almost all strategies and trading systems, either as a filter or as a signal source for making deals.

Thus, the order book is the most important component of the matching engine software and one of the most important tools for a trader, who must know where and how to look at it, how it works, what it displays, as well as the methods of market analysis and trading using it.

Order Matching Process: Algorithms and How They Work

In order to understand how the market is set up, it is initially necessary to understand how orders are brought together. First of all, it is necessary to understand the mechanism of interaction between market orders on the one hand and limit orders on the other hand. This interaction is called order flow. The work of any matching engine is based on algorithms.

An order matching algorithm is an allocation technique used to combine a market order with one or more limit orders. The matching of orders occurs in three stages:

  1. Determination of the current prices of sellers opposite to the market order (buyers)
  2. Determination of the number of assets in the form of limit orders at the best price level
  3. Allocation of the number of assets at the best price level for a trade using the market algorithm.

So how do market orders add up to limit orders previously placed in the stock market? After all, these orders were accepted at different times and from different bidders. The answer to this question depends on the specifics of the market in question. There are many algorithms for the aggregation of orders at each exchange. The logic of each algorithm takes into account the specific needs and depends on the market conditions for which it has been developed.

Below we will consider several basic types of algorithms used to match orders on exchanges.

  • FIFO Algorithm

FIFO, or strict price and time priority algorithm, is the simplest and most intuitive mechanism for allocating trades. Price and time are the only criteria the algorithm uses to match orders. FIFO works according to simple logic. In the process of summarizing incoming market orders, the limit order placed in the order book first gets the highest priority among other orders that are at the same price level.

  • Pro Rata Algorithm

The Pro Rata algorithm pairs an incoming market order with limit orders placed at the same price level in proportion to the size of those limit orders. It executes orders in strict accordance with the price at which they were placed, their size, and the time of placement. The number of assets/lots of the incoming market order is distributed in proportion to the size of limit orders. The obtained values are rounded to the nearest whole number. If the allocated size is less than two, it is rounded to zero.


The trading process is a complex mechanism often not visible to market participants. Against the background of a multitude of charts showing the price movements of an asset, a lot of numbers, and other data, the matching engine of orders, which is a complex system of algorithms based on mathematical models, is the most important component of any exchange, which provides the possibility of trading activities, bringing together buyers and sellers. The knowledge of the order matching process will help better understand the market mechanics and processes and make the trading experience more enjoyable.