A matching engine is a sophisticated piece of software designed to pair buyers and sellers in financial markets.

- Matching engines deploy different algorithms that crawl the order book to find and settle suitable requested trades.

-  The engine’s algorithm collects data from order books provided by different brokers and platforms to find both sides of the trade, a buyer and a seller of the same product and matches them together at the best possible price.

- When the market has low liquidity, the algorithm only finds a handful of available orders and executes them at a higher price. 

- Matching engine algorithms follow different execution models by prioritising first trade proposals or those with more significant volumes.

1. First-In-First-Out  (FIFO)

FIFO matches orders based on when they arrive:

-Oldest orders at a price level get filled first

-Simple and fair approach

- Works well for markets with steady order flow

2. Pro-Rata Matching

This method focuses on order size:

- Bigger orders get a larger share of available trades

- Useful in high-liquidity markets

- Gives all orders at a price level some execution

For example:

Two buy orders at same price: 200 shares/cryptos and 50 shares/ cryptos

Sell order comes in for 200 shares/cryptos 

Pro-Rata gives 160 shares/cryptos  to larger order, 40 to smaller

1. Providing market liquidity 

OMEs can enhance liquidity in a finance market by simplifying transactions between buyers and sellers, resulting in more trade closures.

2. Accessibility 

Matching algorithms allow market players to connect from any location, which enhances finance market accessibility and potentially leads to a more open and effective market.

3. Increased trade efficiency 

A match engine enhances capital market efficiency by automating the pairing of purchase and sell orders, reducing transaction time and manual order matching costs, thus enhancing the market's overall efficiency.

4. Reduced risks 

Automating order matching can reduce human error, inaccuracies, and incorrect prices that may result in funds loss.

5. Transparency of trading 

A match system improves transparency in the financial market by providing equal access to buy and sell order data, leading to more accurate price determination.

1. Scalability

As user demand grows, platforms must scale their infrastructure to handle increased traffic without compromising performance.

2. Latency

Reducing the time it takes to execute trades is crucial for maintaining competitive advantage.

3. Regulatory Uncertainty

Navigating the evolving regulatory landscape is a continuous challenge for crypto trading platforms.