Order matching system: Difference between revisions

Revision as of 12:58, 5 August 2022

Revision as of 14:33, 19 June 2023

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The trading mechanism on electronic exchanges is an important component that has a great impact on the efficiency and [[Market liquidity|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.<ref>{{cite documentciteseerx |last1=Janecek |first1=Karel |last2=Kabrhel |first2=Martin |title=Matching Algorithms of International Exchanges |year=2007 |s2cid=13969809 |citeseerx=10.1.1.192.6947 }}</ref>

===Price/Time algorithm (or First-in-First-out)===

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* 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”"flood" the market, i.e., place limit order in the depth of the market in order to stay in the queue.

===Pro-Rata algorithm===