High-Frequency Trading

'Flash Boys' subject says he gave people an easy out by using 'rigged'

'Flash Boy's' tough words for exchanges
'Flash Boy's' tough words for exchanges

The founder of the trading platform IEX told CNBC in an interview that the question of whether markets are "rigged" has distracted from the larger debate over whether technology is creating unfair advantages.

"The issue with the word 'rigged' is that I gave critics, and gave people that were part of the problem, a very easy out," Brad Katsuyama said Wednesday. "All they had to say was the market is not rigged. That is no defense."

The allegations were first made in the Michael Lewis book "Flash Boys" and by Katsuyama himself.

Katsuyama said he has been trying to make a more nuanced point about who's receiving the advantages of a technological revolution that has revolutionized financial markets in less than a decade.

"What we said is there are systemic disadvantages in the market. People are systemically disadvantaged."

Brad Katsuyama, chief executive officer of IEX Group
Chris Goodney | Bloomberg | Getty Images

The IEX founder, who was the central character in the Lewis book, also defended his trading platform against critics. Asked about an IEX practice that has attracted criticism called "broker priority"—in which brokers trading on IEX can jump ahead of other traders in certain circumstances involving their own clients—Katsuyama said it is a necessary tactic to keep brokers from creating their own "dark pool" trading venues.

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"If we were the only market out there, if we had 100 percent of the volume, I could see the case against it, saying that it favors bigger brokers," Katsuyama said. "You know, I think there is a very strong case for it to stay. I think when there are 57 places to trade, you're giving people choice."

And Katsuyama continued his criticism of U.S. stock exchanges, which he said have become "economically vested" in the success of high-frequency traders over other market players.

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Katsuyama argued that the fast growth of technologyand the lucrative fees exchanges have collected from traders paying for super-fast data feedshas pulled the exchanges away from their core business of matching buyers and sellers.

The exchanges, he said, "started selling the technology. and all of a sudden, when you're selling technology, really whether you admit it or not or whether it was intentional or not, instead of being neutral, you become economically vested in one person winning over somebody else—the person who is buying the technology."

He also said IEX has doubled its trading volume in the first quarter. IEX says its trading volume had gone from 28.4 million shares per day on average in the first quarter to 62.3 million shares per day so far in May. That has been enough, IEX said, to spark the trading venue past a number of the smaller public exchanges.

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The next hurdle for IEX will be raising capital to finance the transition to an exchangecurrently it is a so-called "dark pool"and that will require tens of millions of dollars, technological upgrades and regulatory approval.

—By CNBC's Eamon Javers. Follow him on Twitter: