LOC Orders in Crypto Exchange Development - How They Work and How to Implement Them

As crypto trading evolves, exchanges are adding advanced order types to give traders more control over execution. Limit-on-Close (LOC) is one such option, allowing traders to set a price limit for execution at a defined closing price. While LOC orders are more common in traditional markets, crypto exchanges can adopt them by creating a specific closing session. Understanding how LOC works and what it takes to implement it can help businesses build a more flexible crypto trading platform.

What Is an LOC Order?

LOC stands for Limit-on-Close. It is an order placed with a specific price limit that is intended to execute at the market's closing price, provided that the closing price meets the trader's limit condition.

• For a buy LOC order, the closing price must generally be at or below the specified limit. 
• For a sell LOC order, the closing price must generally be at or above the specified limit.

For example, a BTC buy LOC with a $100,000 limit can execute if the closing price is $99,500, but not if it reaches $100,500 the order remains unfilled or is cancelled based on the exchange's rules. Unlike a standard limit order, an LOC order is tied to a defined closing event. This makes the closing-session mechanism an important part of its implementation.

How Does an LOC Order Work?

An LOC order generally passes through several stages before it is executed.

1. Order Placement

The trader selects LOC, enters the trading pair, quantity, and limit price.

2. Order Validation

The exchange checks the order details, available balance, price limits, and trading rules.

3. Closing Session

The validated LOC orders in crypto waits for the exchange’s defined closing session.

4. Closing Price Determination

The exchange calculates the official closing price based on its predefined method.

5. Limit Check

The system compares the closing price with the trader’s limit price.

6. Order Execution

If the limit condition is met, the order is matched and executed.

7. Settlement or Cancellation

Executed orders move to settlement, while unfilled orders are cancelled or handled according to the exchange’s rules.

Benefits of Adding LOC Orders to a Crypto Exchange

Adding LOC functionality can give an exchange another option for supporting advanced trading strategies.

Greater Price Control

Traders can participate in the closing process without accepting a closing price beyond their specified limit.

Support for Closing-Price Strategies

LOC orders in crypto exchange can be useful for traders whose strategies depend on a defined market closing price.

More Advanced Trading Functionality

Supporting specialized order types can make an exchange's trading infrastructure more flexible.

Support for Professional Trading Requirements

Professional traders and trading firms may require more sophisticated order execution options than basic market and limit orders.

Broader Order-Type Offering

LOC can complement existing market, limit, stop, and other advanced orders within a broader trading system.

Can LOC Orders Be Used on a Crypto Exchange?

Yes, but implementing LOC orders in crypto requires additional market structure because cryptocurrency markets typically operate 24/7.
Traditional markets usually have defined opening and closing times. Crypto exchanges, on the other hand, can continue processing trades throughout the day and night. Therefore, LOC orders in crypto exchange needs to establish its own definition of a closing session.

This may involve:

• Setting a fixed closing time
• Defining which trading pairs participate
• Establishing a closing auction period
• Determining how the closing price is calculated
• Setting an LOC order in crypto exchange cutoff time
• Defining what happens to unfilled orders

The exchange should also consider liquidity differences between trading pairs. A closing mechanism that works for highly liquid BTC or ETH markets may require different safeguards for less-liquid assets.

Key Components Required to Implement LOC Orders

Several exchange components work together to support LOC functionality.

Order Management System

The order management system receives LOC orders, validates their parameters, tracks their status, and manages them through the closing process.

Matching Engine

The matching engine processes eligible LOC orders based on the exchange's matching and execution rules.

Closing Auction Mechanism

A closing auction can help determine the closing price by evaluating eligible orders during a defined closing period.

Order Book

The order book maintains buy and sell orders and provides the data required for the closing process.

Price Validation

Price checks can prevent invalid or abnormal LOC orders from entering the trading system.

API Layer

APIs allow traders, applications, and institutional systems to submit and manage LOC orders programmatically.

Trading Interface

The exchange interface should allow traders to select LOC orders, enter quantity and limit price, and monitor order status.

Settlement System

After execution, the settlement layer updates asset balances and records the completed trade.

How to Implement LOC Orders in Crypto Exchange Development

Implementing LOC orders requires both trading-rule design and technical changes to the exchange infrastructure.

Step 1- Define LOC Trading Rules

Start by defining the exact behavior of LOC orders in crypto. This includes eligible trading pairs, order cutoff time, closing time, price conditions, partial fills, and treatment of unfilled orders

Step 2 - Add LOC to the Order Management System

Introduce LOC in crypto exchange as a separate order type and add the required fields, validation rules, status tracking, and order lifecycle logic.

Step 3 - Create the Closing-Session Mechanism

Because crypto markets operate continuously, establish a specific closing session for markets that support LOC orders.

Step 4 - Integrate Closing-Price Calculation

Build the logic required to determine the official closing price. A closing auction can be used to aggregate eligible orders and establish the execution price based on predefined rules.

Step 5 - Add Limit-Price Validation

The system should compare the determined closing price with each LOC order's limit price and identify which orders are eligible for execution.

Step 6 - Connect LOC With the Matching Engine

Eligible orders are passed to the matching engine for execution according to the exchange's defined rules.

Step 7 - Add API and UI Support

Update trading APIs and the user interface so traders can create, modify, cancel, and monitor LOC orders where permitted.

Step 8 - Test Execution and Edge Cases

Test scenarios such as insufficient balances, expired orders, partial fills, volatile price movements, high order volumes, closing-session interruptions, and unfilled LOC orders.

Planning for Implementation of LOC Order in your Crypto Exchange?

LOC orders can give crypto traders more control over execution by combining a defined closing price with a price limit. While they are not a standard fit for 24/7 crypto markets, exchanges can support them by creating clear closing-session rules and the right trading infrastructure.

If you’re planning to add LOC or other advanced order types to your exchange, Bitdeal, a Crypto exchange development company, can handle the required development, including order management, matching engine integration, APIs, trading interfaces, and testing. This allows businesses to build the order functionality around their specific trading requirements. We make sure all the elements are designed around clear trading rules, LOC can become a useful addition to an exchange’s range of advanced order types.