IEX Group Inc. should have a clear path to winning Securitiesand Exchange Commission (SEC) approval to be a stock exchangedespite claims that its trademark “speed bump” would violate marketrules, according to a top U.S. financial regulator.

IEX's proposal to briefly pause incoming orders is probablyconsistent with rules that seek to ensure a fair and competitivetrading environment, Rick Ketchum, the chief executive officer ofthe Financial Industry Regulatory Authority (Finra), saidWednesday. Regulations “should be sufficiently flexible” toaccommodate IEX's proposal as long as the delay is fully disclosedand found to benefit investors, he added.

Competing exchanges and some brokerage firms have attacked IEX'sspeed bump, a feature that the company says restrictshigh-frequency traders from jumping ahead of slower-movinginvestors. The firm made famous by Michael Lewis's 2014 book,“Flash Boys,” has been feuding with critics for months over thedesign of its market, with both sides lobbying the SEC andCongress.

“I think what they have done is creative,” Ketchum told anaudience of lawyers and lobbyists hosted by the Exchequer Club inWashington. If he was scrutinizing IEX's application, Ketchum saidhe “would focus less on the speed bump.”

SEC Deadline

While Ketchum has no direct say in whether IEX ultimately winsapproval, he is a longtime fixture in Wall Street regulation whoseviews carry weight at the SEC. He worked at the agency as directorof the division that regulates exchanges in the 1980s and 1990s.His current organization, Finra, also has a stake in the debate,because it has contracts with many exchanges to carry out theirregulatory obligations.

The SEC has until March 21 to approve or reject IEX's plan. Thecommission also could seek more time, potentially dragging out adecision for months.

“Rick Ketchum is a universally respected regulator at both theSEC and Finra, and we appreciate his supportive comments andrecognition of our ability to operate under the rules as written,”John Ramsay, IEX's chief market policy officer, said in astatement.

One possibility is that IEX, which is led by CEO Brad Katsuyama,could be forced to change the way another important feature of itsmarket works. IEX's router for sending orders to other venues hasdrawn criticism from firms including Citadel LLC that say it couldtemporarily deprive traders of important information aboutexecutions that should be available immediately.

“I'm not saying it can't be approved, but the router issues arecomplex,” Ketchum said in an interview after his speech. “It seemsto me those are the most difficult ones for the SEC to workthrough.”

In recent letters to the SEC, Citadel and Hudson River TradingLLC have said the router shouldn't be approved as it's currentlydesigned.

“The industry sentiment, even among those who support IEX, seemsto be, 'Mr. Katsuyama, tear down this router,' ” said Bill Harts,chief executive of Modern Markets Initiative, a group founded byhigh-frequency trading firms including Hudson River.

In a letter to clients posted Wednesday, IEX defended how itwould route orders to other venues. The company said it's simplytrying to shield its customers from predatory traders who wouldstep in front of their orders on other exchanges.

–With assistance from Annie Massa.

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