IEX Group Inc. should have a clear path to winning Securities and Exchange Commission (SEC) approval to be a stock exchange despite claims that its trademark “speed bump” would violate market rules, according to a top U.S. financial regulator.
IEX's proposal to briefly pause incoming orders is probably consistent with rules that seek to ensure a fair and competitive trading environment, Rick Ketchum, the chief executive officer of the Financial Industry Regulatory Authority (Finra), said Wednesday. Regulations “should be sufficiently flexible” to accommodate IEX's proposal as long as the delay is fully disclosed and found to benefit investors, he added.
Competing exchanges and some brokerage firms have attacked IEX's speed bump, a feature that the company says restricts high-frequency traders from jumping ahead of slower-moving investors. The firm made famous by Michael Lewis's 2014 book, “Flash Boys,” has been feuding with critics for months over the design of its market, with both sides lobbying the SEC and Congress.
“I think what they have done is creative,” Ketchum told an audience of lawyers and lobbyists hosted by the Exchequer Club in Washington. If he was scrutinizing IEX's application, Ketchum said he “would focus less on the speed bump.”
SEC Deadline
While Ketchum has no direct say in whether IEX ultimately wins approval, he is a longtime fixture in Wall Street regulation whose views carry weight at the SEC. He worked at the agency as director of 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 their regulatory obligations.
The SEC has until March 21 to approve or reject IEX's plan. The commission also could seek more time, potentially dragging out a decision for months.
“Rick Ketchum is a universally respected regulator at both the SEC and Finra, and we appreciate his supportive comments and recognition of our ability to operate under the rules as written,” John Ramsay, IEX's chief market policy officer, said in a statement.
One possibility is that IEX, which is led by CEO Brad Katsuyama, could be forced to change the way another important feature of its market works. IEX's router for sending orders to other venues has drawn criticism from firms including Citadel LLC that say it could temporarily deprive traders of important information about executions that should be available immediately.
“I'm not saying it can't be approved, but the router issues are complex,” Ketchum said in an interview after his speech. “It seems to me those are the most difficult ones for the SEC to work through.”
In recent letters to the SEC, Citadel and Hudson River Trading LLC have said the router shouldn't be approved as it's currently designed.
“The industry sentiment, even among those who support IEX, seems to be, 'Mr. Katsuyama, tear down this router,' ” said Bill Harts, chief executive of Modern Markets Initiative, a group founded by high-frequency trading firms including Hudson River.
In a letter to clients posted Wednesday, IEX defended how it would route orders to other venues. The company said it's simply trying to shield its customers from predatory traders who would step in front of their orders on other exchanges.
–With assistance from Annie Massa.
Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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