Understanding Matching Algorithms in E-commerce Trading

If you are familiar with trading, you might have come across an important term, “matching algorithm,” that is often used in trade matching. Matching algorithms are pre-set rules in a computer configured to help traders find the right buyers and sellers for their trades, allowing them to execute their transactions efficiently and accurately. There are many matching trade algorithms.

The two commonly used matching algorithms are the standard matching algorithm and the custom matching algorithm.

In this article, we will focus on the two commonly used matching algorithms to understand them better.

The Two Major Matching Algorithms

Standard Matching Algorithm

The standard Matching Algorithm (SMA) is one of the most commonly used exchange matching algorithms. It is also known as the single price auction or the continuous double auction algorithm. The SMA works in order matching by first determining whether there is a bid or ask order in the book and then making sure that all bids and asks are matched before moving on to the next step of the algorithm.

 Custom Matching Algorithm

Custom matching algorithms are used to match trades (buy and sell orders) with different trading requirements. This algorithm will allow you to specify the rules of your trade matching process. For instance, you may choose to use a custom matching algorithm in your exchange for the following reasons;

  1. You want to match different products or assets than what is currently available on the market.
  2. Your exchange requires trades that have different attributes or characteristics than those that are currently on traditional exchanges.

When do you use custom Matching Algorithms?

Custom matching algorithms are used when you need to match two or more data sets that have different attributes or data types. For example, a custom matching algorithm will best suit a financial institution that has the following list of requirements.

  • They need to match account numbers between their internal database and those of their bank partner.
  • The bank partner’s account number format differs from theirs. It has an extra digit at the end.
  • The bank partner’s accounts are stored in US dollars while they keep them in euros.

Comparison between Custom and Standard Matching Algorithm

Below is a comparison between the two major matching algorithms as proof that the custom match algorithm is a better option.

Similarities

  • Both algorithms are essential services that facilitate a successful trade transaction. They match grabs and ask orders to determine the result.
  • Both are done electronically.
  • Both algorithms can be used with different order matching methods.

Differences

The standard matching algorithm will facilitate a match of similar orders between record books -single string matching. The custom matching algorithm matches orders from between different record books and also matches the value of each order until a match is found two strings with customization matching.

Custom matching algorithms are used to gain better results most times when compared to the standard algorithm. It gives better performance since it pays attention to specific details.

Custom matching algorithms help reduce cost without sacrificing too much quality and quantity as compared to the standard matching algorithm.

Summary

Understanding the matching programs and algorithms as it is one of the critical processes involved in trade matching. You also need to know that a matching algorithm is not something static but can be modified and customized. These changes are meant to ensure that you get the best results possible.