By Douwe Miedema
WASHINGTON, July 15 (Reuters) - The U.S. stock market regulator should eliminate two pricing models that can create conflicts of interests for brokers, the head of a powerful Senate panel wrote in a letter released on Tuesday.
The letter follows a hearing last month in which Senator Carl Levin, the Michigan Democrat who chairs the panel, scrutinized pricing models U.S. stock exchanges use to attract trading, which have increasingly come under fire.
"Permitting conflicts of interest to persist undermines investors' confidence that they are getting a fair deal," Levin said in a letter to Mary Jo White, who chairs the Securities and Exchange Commission.
The letter was dated July 9 and was released by Levin's office on Tuesday.
Last month's hearing before the Senate Permanent Subcommittee on Investigations focused on the "maker-taker" model, in which exchanges pay brokers for certain types of orders and charge fees for other types of orders.
This raises a potential conflict because brokers may be enticed to choose a trading venue that pays the highest rebate, and not because it is in the client's best interest, Levin said.
A second conflict of interest can arise when wholesale brokers pay retail brokers for order flow, Levin added.
Best-selling author Michael Lewis in his recent book contends the stock market is rigged in favor of firms trading with high-speed computers and raised concerns about conflicts of interest in how orders are routed.
The SEC's White has proposed a series of reforms to address high-speed trading, trading in anonymous so-called dark pool venues and potential conflicts that may influence how brokerages route customer orders.
She has not specifically called for reforms to the maker-taker payment model.
But it has come under renewed scrutiny since last year after researchers from the University of Notre Dame and Indiana University suggested that payment-for-order-flow practices may prevent customers from receiving the best price.
"The SEC has had more than 4-1/2 years to examine the results of the holistic market structure review that it launched in 2010. Further study will not change the fact that conflicts of interest are inherent in the maker-taker system and payments for order flow. The SEC should immediately initiate action to eliminate them," Levin said. (Reporting by Douwe Miedema; Editing by Cynthia Osterman)