What Is a Matching Engine?
A matching engine is software developed for financial markets, whose primary function is to connect buy and sell orders from market participants, automatically executing trades. Any trading exchange, particularly cryptocurrency exchanges, relies on a matching engine. Depending on the exchange’s scale and resources, they either develop their own custom solutions or use third-party matching engines.
How does a matching engine work?
A matching engine is the core mechanism of order execution in exchanges. It operates based on a predetermined set of rules, ensuring that buy and sell orders are processed efficiently according to execution criteria such as order price, creation time, or order size. Below are the main matching engine mechanisms:
- Price-time priority (First In First Out). One of the most common order matching engine technologies, also called FIFO. Orders are prioritized based on price first (better price gets priority), and then by time of placement. For example, if two traders place buy orders at the same price, the one placed earlier is executed first.
- Pro-rata matching. A mechanism that follows a set of rules where larger orders receive execution priority. If multiple traders place orders at the same price level, they are executed proportionally based on their order size.
- Regular lot matching. Regular lot matching is a type of execution mechanism in a matching engine where trades must be placed in fixed lot sizes (e.g., 100 shares, 1 contract) and cannot be smaller or fractional. This is common in traditional stock and futures markets. In crypto trading, which commonly uses other matching mechanisms, exchanges also have a minimum trade size, but it is usually very small, and traders can buy or sell any amount above it without being restricted to fixed lot multiples.
- Dark pool matching. In this mechanism, orders are executed privately and do not appear in the public order book. It is commonly used in institutional trading, where order anonymity helps reduce market impact and increase execution flexibility for large trades. For instance, one of the projects in our Top Picks, the DXmatch matching engine by Devexperts, supports dark pool solutions, allowing for the private execution of large trades without displaying them in the public order book
Why matching engines matter
A matching engine is essential for the functioning of a trading exchange, ensuring order execution and management by processing buy and sell orders according to predefined rules. It also provides real-time market data, including current pricing, trading volume, and order book updates.
Conclusion
In this article, you’ve learned about the top matching engine solutions in the crypto space. These engines are crucial to the functioning of exchanges, providing a seamless and efficient trading experience. From price-time priority (FIFO) to dark pool matching, each solution offers unique benefits tailored to the needs of different exchanges. Understanding these options helps identify the best solutions for building and managing high-performance crypto exchanges.
FAQ
Matching engine processes and executes trades by matching buy and sell orders, ensuring fair and efficient market operations.
Order book is a real-time list of buy and sell orders, showing market depth and liquidity. A matching engine is the system that processes these orders, executing trades based on predefined rules like price-time priority. The order book provides market visibility, while the matching engine operates in the backend to match and execute trades.
Regular lot matching is an execution mechanism where trades must be placed in fixed lot sizes (e.g., 100 shares, 1 contract) and cannot be fractional. Common in stocks and futures, it differs from crypto trading, where minimum trade sizes exist but are usually very small, allowing flexible order amounts.
Order book is a real-time list of buy and sell orders on an exchange.
Order matching is the process of pairing buy and sell orders based on predefined rules like price-time priority (FIFO) or Pro-Rata.
Dark pool matching is a private order execution mechanism where trades are matched off the public order book, minimizing market impact and ensuring discreet execution for large orders.