The automation of trading markets has given rise to a variety of regulatory concerns. We briefly review the regulatory approach used by the U.S. Securities and Exchange Commission in dealing with automation of equity markets and the growth of proprietary trade execution systems in these markets. It is argued that the statutory definitions underlying regulation of such institutions are no longer viable in the face of technological advances in trading system technology. Alternative approaches to the regulation of trading systems are examined. We propose and analyze a strategy composed of the separation of the regulation of market structure from the regulation of other areas of public concern, and the employment of competition policy to regulate market structure. A central implication of this approach is that there should be no distinction in the regulation of market structure issues between institutions now classified as securities exchanges and those which are classified as broker-operated trading systems.
