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UPDATE 2-U.S. stock exchange pricing model comes under fire at Senate hearing

(Adds comments, details from hearing)

WASHINGTON, June 17 (Reuters) - The pricing model used by U.S. stock exchanges to attract liquidity came under fire on Tuesday, as several Wall Street executives called for ending the practice and two U.S. senators raised concerns about the potential conflicts it creates.

In a Senate hearing, officials from Intercontinental Exchange's New York Stock Exchange and Vanguard expressed support for ending the "maker-taker" model: a system used to reward brokers who make offers to buy or sell stocks on exchanges.

"We are seeking support for the elimination of maker-taker pricing," said NYSE President Thomas Farley. "Broad adoption of this policy would reduce the conflicts inherent in such pricing schema."

Tuesday's hearing before the Senate Permanent Subcommittee on Investigations comes a few months after author Michael Lewis released a new book which raised questions about payment for order flow and accused high-speed traders of rigging markets.

Earlier this month, Securities and Exchange Commission Chair Mary Jo White announced she is pursuing a series of reforms to address high-speed trading, trading in anonymous "dark pool" venues and potential conflicts that may influence how brokerages route customer orders.

White also called on exchanges to conduct a review of order types - an issue Farley said his exchange will address in part through a six-month moratorium on permitting any "new or novel" order types.

But while White outlined a proposal to enhance disclosures surrounding how brokerages route institutional orders, she did not explicitly propose maker-taker reforms.

STUDY RAISES QUESTIONS

The maker-taker model came under fresh scrutiny last year after researchers from the University of Notre Dame and Indiana University released a study suggesting that payment-for-order-flow practices may create conflicts and prevent customers from receiving the best price in the shortest possible time frame.

In the maker-taker model, brokerages earn rebates by sending in resting orders to bring more liquidity, but must pay fees if they take away liquidity through orders that can be executed immediately.

In addition, large market makers, such as KCG Holdings , Citadel LLC, Citigroup and UBS AG, typically pay cash fees in the neighborhood of 30 cents per hundred shares for orders.

The study looked at four discount brokerages that accept payments for order flow: TD Ameritrade, E*Trade, Scottrade and Fidelity Investments.

It found that the firms tend to route "limit orders" to the exchanges that pay the highest rebate fees - a conflict that may prevent orders from being filled and violate best execution rules.

The Senate panel's chairman, Carl Levin of Michigan, and its ranking member, John McCain of Arizona, said they were troubled by the findings.

"There is significant evidence that these conflicts can damage retirement savings," Levin said.

McCain called for more transparency on the payments to brokers. He also called for changes to rules which he claimed force firms to take the "bait" of high-speed traders who dangle great prices in front of investors, and then rush ahead to buy it first and sell it higher.

Not all experts on Tuesday were enthused about eliminating maker-taker pricing, showing how it could be difficult to pursue changes to the model.

TD Ameritrade Senior Vice President Steven Quirk, whose firm was highlighted in the study, questioned the relevance of some of the data used, adding that TD Ameritrade monitors for best execution and discloses fees and rebates.

Joe Ratterman, the chief executive of NYSE rival, the BATS Global Markets exchange, said maker-taker pricing encourages liquidity makers to "post tighter bid-offer spreads" that benefit all investors and urged regulators to focus on enhancing disclosures to manage conflicts.

Robert Battalio, an author of the study, defended his research in a testy exchange with Senator Ron Johnson, with the Wisconsin Republican questioning the gravity of the problem.

"If I am doing a $2,000 trade, you're concerned about a conflict of interest where I might have to pay an additional 40 cents? Is that what this is about?" asked Johnson.

"No, it's about the fact that you didn't get to trade," Battalio shot back. "Your assumption that you trade is wrong."

Brad Katsuyama, the star of the Lewis book and CEO of trading venue IEX Group, told senators he agrees with Battalio.

"Routing specifically with the goal of maximizing your rebate ... leads to adverse execution quality," he said.

(Reporting by Sarah N. Lynch; Editing by Eric Beech and Jonathan Oatis)