By Chuck Mikolajczak

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is preparing to act on a controversial request by new trading group IEX Group Inc to launch a new U.S. public stock exchange, and has received a recommendation from its staff that it approve the exchange, according to a Wall Street Journal report on Tuesday.

The proposed exchange from IEX, made famous by the Michael Lewis book "Flash Boys: A Wall Street Revolt," is notable because it would be the only one in the United States to include a so-called "speed bump" - a 350 millionths-of-a-second delay in all incoming and outgoing orders.

According to IEX, that protects investors from high-frequency traders who can pick up on trading signals and use faster technology to electronically front-run slower investors.

Other exchanges, including Nasdaq <NDAQ.O>, the New York Stock Exchange <ICE.N> and BATS Global Markets <BATS.Z> have been vocal in their opposition to an IEX approval. Nasdaq has suggested any SEC approval could be challenged.

The SEC has a June 18 deadline to act on the proposal. An internal source told Reuters the commission wanted to see competition to the existing model of electronic trading and order execution, and was unlikely to miss that deadline.

The WSJ report said the commission was likely to vote on the order on Friday and to approve it. An SEC spokeswoman declined comment the commission would meet that day.

Any new exchange means exchanges would get a smaller share of the market data revenue from trade participants. In addition, IEX's speed bump could dampen trading volumes, which would also drag on exchange revenue.

Critics from competing exchanges and elsewhere have said the speed bump is counter to the SEC's own regulation prohibiting intentional delays of price displays, also known as Regulation NMS, for National Market System. Competing exchanges have also complained about IEX asking for discretion to send orders to other exchanges without a speed bump.

That would give IEX too much discretion to decide how individual trades are made, critics say, with some trades executed on stale quotes while others were executed immediately.

"Opposing arguments are self-serving statements from those who profit by the way that trades are intermediated today," said IEX president and co-founder Ronan Ryan.

If the SEC approves, IEX expects to implement all stock symbols on Sept. 2, ceasing operations of the IEX Alternative Trading System (ATS), also known as a dark pool, according to its website.

If the SEC wants an extension of the June 18 deadline, it would need to request one from IEX.

A denial would undoubtedly delay IEX's timetable, leaving it with the choice of trying to gain approval again or choosing to remain an ATS.

"We have a number of options but it's premature to speculate what we would do next," IEX spokesman Gerald Lam said.

SEC staff already has sent its recommendation to the commission, the internal source confirmed to Reuters.

Nasdaq has said the speed bump "would be unlikely to survive judicial scrutiny" in a comment letter crafted by law firm Gibson Dunn, which has successfully challenged the SEC multiple times.

IEX initially filed its application in mid-September, prompting a torrent of more than 460 comments. IEX has since amended its proposal five times.

The Financial Industry Regulatory Authority (FINRA) has voiced support for the application. Tom Gira, executive vice president for market regulation at FINRA said it should move forward, "in the interest of allowing innovation to continue to exist," at the Reuters Financial Regulation Summit in May.

Jamil Nazarali, head of Citadel Execution Services at Citadel Securities, one of the largest private U.S. trading venues, was blunt during a panel discussion on equity market structure at a Sandler O'Neill conference last week.

"We just think this would be bad for the markets, it’s unfair, and it doesn’t belong as a public exchange," he said.

(Additional reporting by Herb Lash; Editing by Chizu Nomiyama and Linda Stern)