Schwab Won’t Stop Paying Order Fees : Securities: Firm says ending the controversial practice would have cost it too much business.

After announcing two months ago that it would break ranks with other Wall Street firms to end a controversial practice known as payment for order flow, Charles Schwab & Co. reversed itself this week, saying the move would have cost it too much business.

Under payment for order flow, a dealer in Nasdaq stocks pays other brokerage firms two or three cents a share to send it their customers’ orders for execution. Critics say the payments are analogous to kickbacks to brokerage firms, which send customer orders to dealers willing to pay the brokerage firms a fee rather than searching all dealers for the best possible price for their customer.

Schwab spokesman Hugo W. Quackenbush said Mayer & Schweitzer, the Schwab subsidiary that deals in 3,500 Nasdaq stocks, has indefinitely postponed plans to end the practice because it became clear that competitors that still offered such payments were poised to steal a big chunk of Mayer & Schweitzer’s business.

“We didn’t want to be the pioneer with arrows in our back,” Quackenbush said.

Mayer & Schweitzer executes orders for customers of Schwab, a large discount brokerage, and for about 125 smaller brokerage firms.

However, Schwab said it is continuing with an innovative computer system that automatically seeks better prices for customers buying or selling Nasdaq stocks. The new system was strongly praised by Securities and Exchange Commission Chairman Arthur Levitt, who has sought to end practices on Nasdaq that prevent small investors from getting the best available prices for Nasdaq stocks.

The computer system searches for prices better than dealers’ publicly quoted prices.

On Friday, Richard Lindsey, the SEC’s new director of market regulation, said the agency is pleased that Schwab is continuing with the new system, and said he would not criticize the firm’s decision to continue payment for order flow.