This chapter considers the challenges that the automation of trading poses to the regulation of capital markets. It first discusses recent advances in information technology with respect to order execution, generation and routing, as well as the rise of high-frequency trading and other algorithmic trading strategies. It then considers their consequences for the efficiency, liquidity, and integrity of capital markets, as well as their impact on the regulation of and fair access to various information flows. The chapter then critiques policy proposals for regulating automation that aim to suppress deleterious trading (such as financial transaction taxes) or limit its negative externalities. The chapter ends with an assessment of how policy makers might adapt to automation through policies that promote fair disclosure and flexible access to information flows.
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