This node is on how the exchange matches orders. Yes, that is potentially a dull subject if you are not into trading. So don't be alarmed if Cthulhu or Live Nude Lesbians will not be involved. Such is the sad reality of exchange matching rules. Sorry about that.


Let's first consider what we are talking about. On an exchange, you can trade products. We'll assume we are trading shares because that's easiest, but similar principles hold for options and futures. Each of these products has an order book. This consists of a list of buy and sell orders. A buy order in the book is called a bid and a sell order a offer. Bids have a bid price and a volume and offers an an ask price and a volume. A book might look like:

Volume Bid Ask Volume
4000 6.00 6.30 1000
2000 5.80 6.31 4000
5532 5.70 6.36 1503

Now, imagine I place a limit order to sell 5000 shares at 5.90. 4000 shares will be sold @ 6.00, netting 24000. The rest of the order, 1000 shares, does not match: the next best bid is 5.80. The order book will now look like:

Volume Bid Ask Volume
2000 5.80 5.90 1000
5532 5.70 6.30 1000
6.31 4000
6.36 1503

This is all automatically done by the matching engine of the exchange, a computer somewhere in a basement, at least, in the exchanges I know of. I have heard that in the US, things are still traded using humans in a trading pit.

Priority rules

Now, consider the situation in the first table. Assume that for instance, that 4000 bid consists of orders of 3 separate people, all bidding 6.00, one for 2000 lots and the other two for 1000. Each of them gets filled: they all buy their shares. However, now imagine that the sell order was not 4000, but only 1000. The total book will then look like

Volume Bid Ask Volume
3000 6.00 6.30 1000
2000 5.80 6.31 4000
5532 5.70 6.36 1503

The main question is: who gets the shares? There are three common principles for this, which I will briefly outline below.

Time/price priority

In time-price priority, the person who was the first to bid at that level has priority. So, if one of the persons with 1000 shares was first, he gets them. The rest gets nothing. This is the most common rule in Europe. Markets with time-price priority tend to be tight, as there is an incentive to bid or offer slightly better than the other people, in order to be sure to get done.

Pro rata

In a pro rata market, time priority does not matter. Everyone gets a proportional part of the shares. So, the person with 2000 gets 500, the other two get 250. This system makes it tempting to put large orders in the market, to make sure you get a decent slice of the pie. This would require being less competitive in price. This system is used fairly often, but not exclusively, in the US. The advantage here is that large volume tends to be available.

Someone is preferred

In some situation, one party, often a market maker, is preferred over another party. They always get a minimum percentage, for instance 40 %. So, if we have a pro rata market, and the preferred party has 1000 lots, they get 400, the person with 2000 gets 400 as well, and the person with 1000 gets 200.


In this writeup, I have tried to scratch the surface of exchange matching rules. When exotic order types come into play, things get a bit more complicated, but this should cover the basics. We have also seen the difference between time-price priority and pro-rata markets. Knowing what rules are used on the exchange you are trading on is important if you want to trade optimally.

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