Matching Orders

The process of entering identical orders of buy and sell simultaneously to encourage trading in that particular security

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What is Matching Orders?

Matching orders refers to the process of entering identical orders of buy and sell simultaneously to encourage trading in that particular security.

Matching Orders

When an investor wants to buy a certain quantity of security and another investor seeks to sell a similar quantity of that security at a similar price, the orders of both the investors match, and hence a transaction is processed. A matching orders system is the means through which buy orders are matched with sell orders to carry out trading of securities.

Before, matching of orders was completed offline by brokers. The process of matching orders took place over face-to-face interactions in open auctions. The electronic matching system was introduced in the 1980s in the U.S., and the Chicago Stock Exchange (then known as the Mid-West Stock Exchange) was the first in the world to execute orders electronically.

The process of matching orders became fully automated in 2010.


  • Matching orders refers to the process of entering buy and sell orders simultaneously to facilitate the trading of the security.
  • In modern exchange markets, buy and sell orders are matched electronically.
  • Many algorithms are available for matching buy and sell orders. However, the First-In-First-Out (FIFO) and Pro-Rata algorithms are the most widely used matching order algorithms.

Process of Matching Orders

Matching orders is primarily the responsibility of market specialists and liquidity providers in the market. Matching occurs when buy and sell orders submitted for the same stock or security are close in terms of time and price.

The buy and sell orders are believed to be compatible if the buy order’s maximum price exceeds or equals the sell order’s minimum price. The compatible buy and sell orders are then prioritized using computerized systems for matching.

Accuracy and swiftness are critical in modern-day exchanges. Investors actively trading in exchange markets seek ways to tackle the inefficiencies of the trade market. If the matching orders system lags, buyers and sellers may carry out trades at lower prices than ideal trade prices; thus, it may result in losses to the investors.

In addition, the matching order system should be efficient so that buyers and sellers benefit equally, and the volume of orders is maximized.

Matching Orders Algorithms

Electronic exchange is an important part of trading and affects the efficiency of the securities market. There are different algorithms available for matching orders; however, choosing an appropriate algorithm is crucial for the trading system.

First-In-First-Out (FIFO) and Pro-Rata are the two most common algorithms used for matching orders.

1. First-in-First-Out (FIFO)

FIFO is also known as a price-time algorithm. According to the FIFO algorithm, buy orders take priority in the order of price and time. Then, buy orders with the same maximum price are prioritized based on the time of bid, and priority is given to the first buy order. It is automatically prioritized over the buy orders at lower prices.

For example, a buy order for 300 shares of a security at $50 per share is followed by another buy order of 100 shares of the same security at a similar price.

According to the FIFO algorithm, the total 300 shares buy order will be matched to sell orders. There can be more than one sell order. After the 300 shares buy order is matched, the 100 shares buy order matching will start.

2. Pro-Rata

A system using the Pro-Rata algorithm also gives priority to the highest-priced buy order. However, buy orders with the same highest price are matched in proportion to each order size.

For example, buy orders of 300 shares and 100 shares of the same security are active in the system. At the same time, a compatible sell order of 300 shares becomes active. The sell order will not be able to fulfill both the buy orders.

The Pro-Rata algorithm will match 225 shares to the 300-share buy order and 75 shares to the 100-share buy order. Hence, both buy orders are partially filled. Here, the Pro-Rata algorithm fills 75% of both buy orders.

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