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[[File:Deutsche-boerse-parkett-ffm008.jpg|thumb|right|Order matching at the heart of trading systems in [[Deutsche Börse]].]]
An '''order matching system''' is an electronic system that matches [[order (exchange)|buy and sell orders]] for a [[stock market]], [[commodity market]] or other traded financial instruments such as [[futures contract]]s. The order matching system is the core of all electronic [[Exchange (organized market)|exchanges]] and are used to execute orders from participants in the exchange.
Orders are usually entered by members of an exchange and executed by a central system that belongs to the exchange. The algorithm that is used to match orders varies from system to system.<ref>{{cite web |url=http://www.cmegroup.com/confluence/display/EPICSANDBOX/Matching+Algorithms |title=Matching Algorithms |publisher=[
Electronic order matching was introduced in the early 1980s in the United States to supplement [[open outcry]] trading (for example the then Mid West Stock Exchange (now the [[Chicago Stock Exchange]]) launched the "MAX system, becoming one of the first stock exchanges to provide fully automated order execution" in 1982).<ref>{{cite web |url=http://www.chx.com/chx/history/ |title=History:Chicago Stock Exchange Historical Timeline|accessdate=November 2015}}</ref><ref>''Commodity Exchange Act Cea: Issues Related to the Regulation of Electronic Trading'' by Thomas J. McCool, Cecile O. Trop 2000 {{ISBN|0-7567-0329-8}} page 18</ref> ▼
Large limit orders can be "front-run" by "penny jumping". For example, if a buy [[limit order]] for 100,000 shares for $1.00 is announced to the market, many traders may seek to buy for $1.01. If the market price increases after their purchases, they will get the full amount of the price increase. However, if the market price decreases, they will likely be able to sell to the limit order trader, for only a one cent loss. This type of trading is probably not illegal, and in any case, a law against it would be very difficult to enforce.<ref name="Trading and Exchanges">{{cite book|last1=Harris|first1=Larry|title=Trading and Exchanges|date=24 October 2002|publisher=Oxford University Press|___location=New York|isbn=0-19-514470-8|edition=First}}</ref>▼
The matching algorithms decides the efficiency and the robustness of the order matching system. There are two states for a market, continuous trading where orders are matches immediately or auction where matching is done at fixed intervals. A typical example when a matching systems works in auction state is at the market open when a number of orders have built up.
▲Orders are usually entered by members of an exchange and executed by a central system that belongs to the exchange. The algorithm that is used to match orders varies from system to system.<ref>{{cite web |url=http://www.cmegroup.com/confluence/display/EPICSANDBOX/Matching+Algorithms |title=Matching Algorithms |publisher=[http://www.cmegroup.com/ CME Group]|accessdate=November 2015}}</ref>
==History==
▲In modern trading, the order matching system and [[Draft:Implied Order System|implied order system]] or Implication engine is often part of a larger [[electronic trading]] system which will usually include a [[settlement system]] and a [[central securities depository]]. These services may or may not be provided by the organisation that provides the order matching system.
▲Electronic order matching was introduced in the early 1980s in the United States to supplement [[open outcry]] trading (for example the then Mid West Stock Exchange (now the [[Chicago Stock Exchange]]) launched the "MAX system, becoming one of the first stock exchanges to provide fully automated order execution" in 1982).<ref>{{cite web |url=http://www.chx.com/chx/history/ |title=History:Chicago Stock Exchange Historical Timeline|accessdate=November 1, 2015}}</ref><ref>''Commodity Exchange Act Cea: Issues Related to the Regulation of Electronic Trading'' by Thomas J. McCool, Cecile O. Trop 2000 {{ISBN|0-7567-0329-8}} page 18</ref>
==Algorithms==
There's quite a variety of algorithms for auction trading, which is used before the market opens, on market close etc. but most of the time, the markets do
The trading mechanism on today’s electronic exchanges is an important component that has a great impact on the efficiency and liquidity of financial markets. The choice of matching algorithm is an important part of the trading mechanism. The most common matching algorithms are the
Comparison of Price/Time and Pro-Rata Following are few basic remarks about the two basic algorithms and their comparison. <ref>{{Cite web |url=https://pdfs.semanticscholar.org/6d92/0528fc5a3a25cb7a627b93ae3e7d5789bde8.pdf |title=Matching Algorithms of International Exchanges |website=pdfs.semanticscholar.org |
▲There's quite a variety of algorithms for auction trading, which is used before the market opens, on market close etc. but most of the time, the markets do ''continuous trading''.
|author=Karel Janeˇcek and Martin Kabrhel |access-date=2018-12-14}}</ref>
▲The trading mechanism on today’s electronic exchanges is an important component that has a great impact on the efficiency and 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 web|url=https://pdfs.semanticscholar.org/6d92/0528fc5a3a25cb7a627b93ae3e7d5789bde8.pdf|website=pdfs.semanticscholar.org|access-date=2018-12-14}}</ref>
▲'''Price/Time algorithm:'''
* Motivates to narrow the spread, since by narrowing the spread the limit order is the first in the order queue.
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* 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” the market, i.e., place limit order in the depth of the market in order to stay in the queue.
* Motivates other orders to join the queue with large limit orders. As a consequence, the cumulative quoted volume at the best price is relatively large.
* Does not motivate to narrow the spread in the natural way. This weakness is partially offset by introducing the time priority element for the first order that makes a new price.
==Efficiency==
▲Large limit orders can be "front-run" by "penny jumping". For example, if a buy [[limit order]] for 100,000 shares for $1.00 is announced to the market, many traders may seek to buy for $1.01. If the market price increases after their purchases, they will get the full amount of the price increase. However, if the market price decreases, they will likely be able to sell to the limit order trader, for only a one cent loss. This type of trading is probably not illegal, and in any case, a law against it would be very difficult to enforce.<ref name="Trading and Exchanges">{{cite book|last1=Harris|first1=Larry|title=Trading and Exchanges|date=24 October 2002|publisher=Oxford University Press|___location=New York|isbn=0-19-514470-8|edition=First}}</ref>
==See also==
* [[Open outcry]]
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