The Dutch auction, also known as a descending price auction, uses a bidding process to find the optimal market price for the stock, the highest price at which an issuing company can sell ALL the available shares.

An alternative to the traditional negotiated pricing process used by Wall Street investment bankers to set the price of a corporations' initial public offering (IPO) of its shares, it is THE method used for US Treasury auctions.

It's also similar to the method used by New York Stock Exchange specialists to set the opening price of their assigned stocks for trading each day.

Deriving its name after the famous auctions of Dutch tulip bulbs in the 17th century, it's based on a pricing system devised by Nobel prize winning economist William Vickrey.

What's so good about it? Ask Google. It's the method they used to bring their company public and it couldn't have worked out any better for all concerned.

The company obtained a better price for its stock (over $100, rather than the $45 or so the investment bankers wanted to "steal" it for their friends), the public was able to fully participate, and, as of this writing, the stock has gone to over $400!

How does it work? Let's take a look at a simple example to illustrate the principle.

Let's say a company wants to offer a total of 1,000 shares to the public. So they invite the public to bid using the Dutch auction method.

Let's further say one investor bids up to $10 for 100 shares, a second investor bids up to $9 for 200 shares, a third bids up to $8 for 300 shares, a fourth bids up to $7 for 400 shares, a fifth bids up to $6 for 500 shares, a sixth bids up to $5 for 600 shares.

Starting with the highest bid and working down, all 1000 shares will be sold at $7.

It's fair to everyone involved. It's capitalism at it's best.

So why do the Wall Street investment bankers hate Dutch auctions with such a passion?

The obvious answer is they lose control of their favorite "toy". No more fat underwriting fees, no more favored few, no more anything!