IEX exchange bid should be judged on its own merits: FINRA chief

A proposal to let US stock exchanges delay order responses by less than a millisecond will likely move ahead, paving the way for "Flash Boys" heroes IEX Group to become an exchange, the head of Wall Street's self-funded watchdog said on Wednesday. Such delays would not harm the ability of market participants to access stock quotes and could encourage innovation from exchanges that benefits investors, the US Securities and Exchange Commission said in its proposed interpretation on automated quotations.
The proposal was met with widespread criticism from industry participants and market operators. The head of Nasdaq Inc said approval of the interpretation would greatly complicate the market and that exchanges would respond by creating thousands of new ways to execute orders. "To some degree the SEC's interpretation has been criticized unfairly," Richard Ketchum, chief executive officer of the Financial Industry Regulatory Authority said in an interview with Reuters.
He said the SEC was clear that in order for a market with a delay, or "speed bump," to be approved, it would have to show it could provide value to some group of investors, and that it is not unfairly discriminatory to other investors. The interpretive release was tied to the exchange application of IEX, which currently operates as a more lightly regulated alternative trading system.
IEX says it slows orders by 350 millionths-of-a-second in order to prevent predatory traders using high-speed technology from picking up on trading signals and then racing ahead and electronically front-running investors' orders, a practice termed "latency arbitrage." Author Michael Lewis chronicled IEX's efforts in his book, "Flash Boys: A Wall Street Revolt."
"It seems to me there is flexibility to try to address some of the issues from the standpoint of latency arbitrage that IEX tries to do," Ketchum said. "It should be judged on its own merits." As electronic trading approaches the speed of light, trading venues should have enough leeway to minimize speed as a key to trading success if it helps serve the interests of investors, SEC Chair Mary Jo White said during a June 2014 speech. If not, she said, the SEC should reconsider its rules and market practices that get in the way. The SEC's interpretive release was a step in that direction, Ketchum said. "That's what Mary Jo's speech was talking about and I doubt if the SEC would walk away from that."