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.
Ian Domowitz, Department of Economics, Northwestern
University Ruben Lee, Oxford Finance Group, Oxford, England
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