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For the basic user, trading may look straightforward, where an order is requested to buy or sell a specific instrument for a given market price. The process seems simple for the user’s side.
However, from a technical point of view, some complexities and sophisticated systems administer the process and make every order executed correctly and in an orderly manner. The matching engine is the core of these operations.
Matching engines are the backbone of trading systems, and they have replaced the manual process the brokers used to follow in previous times to find a counterparty and fulfill a trade. Let’s dive deeper into the matching engine and how it works.
Understanding The Matching Engine
When a trader places a “buy” order for a particular product, it requires another market participant to sell the same security at a value near the market price, called the asking price.
The trader’s buying order is requested by the trading platforms at a price called the bidding price. The bidding and asking prices do not match, and the difference between them is called the spread, which goes to the broker as a service fee.
The matching engine’s role here is to find a selling order that matches the buying order executed by the trader at the nearest price possible and as quickly as possible.
The process happens by scanning the order book for any suitable pending order on a first-in, first-out basis.
Elements of Matching Engines
Matching engines deploy complicated systems and algorithms to scan, analyze and determine a matching market order to fulfill a market trade. Therefore, the engine’s performance is affected by these factors.
Execution Speed
Processing speed is the most important factor when it comes to trading to avoid slippage and tiny price changes. This element is affected by liquidity levels. Trading platforms offer a huge number of assets and securities, engaging thousands of traders in buying and selling activities.
Costs
The matching engine costs are basically the transaction and trading fees imposed by the brokerage company, which vary by several factors.
The engine’s efficiency in finding matching orders at smaller spreads results in lower fees. Moreover, centralized engines usually charge more because they use multiple intermediaries and consoles to exchange data and execute orders.
Security
Centralized engines use online servers and APIs to exchange data, making them targeted for cyber threats. On the other hand, decentralized engines offer peer-to-peer trading networks that do not rely on a cloud server, making them faster and more resistant to attacks.
Conclusion
Matching engines power trading platforms by processing market orders and finding suitable orders to execute trade requests. For every “buy” order, the engine finds a proper “sell” order, and vice versa.
There are two types of engines, centralized and decentralized that determine the security level and the server that hosts the transactions.
