Abstract New trading technologies are transforming securities markets, and with their rise have come important questions regarding the regulation of new and traditional trading mechanisms. This article provides a law and economics perspective on the regulation of alternative trading systems. We argue that alternative trading systems play a distinct role in the market and in particular solve the conflict‐of‐interest problem that exists between brokers and dealers. We propose a general strategy for their regulation that incorporates this economic role. We suggest a regulatory framework that permits providers of services to opt into particular regulatory frameworks as a way of fostering innovation and competition. The functional approach we outline is consistent with the Securities and Exchange Commission's regulatory objectives of fairness, efficiency, and transparency of market transactions.