Matching algorithm

Matching algorithms play a crucial role in trading venues by ensuring fair and efficient execution of trades. They establish the priority of orders based on specific rules. Common examples of matching algorithms include:

• Pure FIFO (first in, first out): This algorithm processes orders in the exact sequence they are received, ensuring that the first order entered into the system is the first one to be executed.
• Pro rata: This algorithm distributes executions among multiple orders at the same price based on the size of each order. Larger orders receive a greater proportion of the available shares, which can help manage liquidity more effectively.
• Price-broker-time: This algorithm considers the price of orders first, then the broker or participant submitting the order, and finally the time of order entry. It allows for more nuanced decision-making, especially in competitive environments where multiple orders may be vying for execution at the same price.

The choice of matching algorithm can influence market dynamics, liquidity, and the behavior of traders. Different venues may implement unique algorithms based on their specific trading model and objectives, which can impact everything from transaction costs to execution speed.