How Exchanges Work

Matching buyers and sellers

~25 min · 6 lessons

What you'll learn

✓Explain a limit order book
✓Describe the role of a matching engine

Lessons

📣
From the Floor to the Engine
How a shouting match became a server farm
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The Order Book
Finish the previous lesson to unlock
Price-Time Priority
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Market vs Limit Orders
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A Trade's Journey
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Final Boss: Read the Engine
Finish the previous lesson to unlock

Sources

All content is drawn from the sources below. We deliberately avoid unverified material.

Trading and Exchanges: Market Microstructure for Practitioners (Larry Harris, 2003)
Oxford University Press · book
Reference text for limit order books, price-time priority, market vs limit orders, and order precedence rules.
NYSE History and the Trading Floor
Intercontinental Exchange / NYSE · institutional
Background on the open-outcry floor and the role of specialists used in lesson 1.
https://www.nyse.com/history-of-nyse
Nasdaq INET Trading Platform Overview
Nasdaq, Inc. · institutional
Source for modern matching engine performance and architecture used in lesson 1.
https://www.nasdaq.com/solutions/marketplace-technology
Regulation NMS, Final Rule (Release No. 34-51808, June 2005)
U.S. Securities and Exchange Commission · institutional
Authoritative source for Rule 611 (Order Protection Rule) and the protection of price priority across US equity markets.
https://www.sec.gov/rules/final/2005/34-51808.pdf
MiFID II / MiFIR (Directive 2014/65/EU and Regulation 600/2014)
European Securities and Markets Authority (ESMA) · institutional
Title III on trading venues and pre- and post-trade transparency, referenced in lesson 3.
https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir
Order Types: Market Orders and Limit Orders (Investor.gov)
U.S. Securities and Exchange Commission · institutional
Plain-English reference for market and limit orders, used in lesson 4.
https://www.investor.gov/introduction-investing/investing-basics/glossary/market-order
Market Maker (Investor.gov)
U.S. Securities and Exchange Commission · institutional
Reference for the role of market makers and two-sided quotes used in the boss lesson scenario.
https://www.investor.gov/introduction-investing/investing-basics/glossary/market-maker
DTCC: How NSCC Clears and Settles US Equities
Depository Trust & Clearing Corporation (DTCC) · institutional
Source for the role of the clearinghouse in lesson 5.
https://www.dtcc.com/clearing-services/equities-clearing
SEC Adopts Rule to Shorten the Standard Settlement Cycle to T+1 (February 2023)
U.S. Securities and Exchange Commission · institutional
Source for the T+1 settlement transition used in lesson 5 and the boss lesson.
https://www.sec.gov/news/press-release/2023-29
Hendershott, T., Riordan, R. 'Algorithmic Trading and the Market for Liquidity'
Journal of Financial and Quantitative Analysis · academic
Background reference on electronic markets, liquidity provision, and how modern matching engines reshape order flow.