This is different from traditional book-building methods for conducting IPOs, where an institution verbally tells its broker, “I’ll take 10 million shares.” Instead, Liquidnet is requiring investors to submit the actionable indications of interest electronically. Investors will be asked to enter “actionable indications of interest, which means the price they put down could be hit,” explains a source who is familiar with the offering process.

However, Liquidnet, known for cutting out the middlemen, is not going as far as Google did in its $1.7 billion electronic auction process back in 2004. Liquidnet and its underwriters are going to set the price manually and some top Wall Street names are leading the underwriting.

Unlike Google’s offering, Liquidnet’s IPO will not be an electronic auction. Instead, Liquidnet will arrive at offering price through a negotiation with its underwriters using traditional indicators of value, stated the filing.

The non-traditional electronic offering process is laid out in Liquidnet’s 264-page registration statement filed with the Securities and Exchange Commission last week. Given that Liquidnet is an electronic marketplace where buyers and sellers of large blocks of stock meet in a natural liquidity pool, it makes sense that technology is facilitating this process.

Just as institutions trade anonymously on the Liquidnet electronic negotiation network, they can directly and anonymously participate in the offering. If they want to participate, investors must have an account with one of the underwriters —Goldman, Sachs & Co., Credit Suisse Securities (USA) LLC, Liquidnet, Inc. (a registered broker dealer), JP Morgan, Lehman Brothers or Sandler O’Neill. Investors must provide the number of shares they are interested in purchasing and the price per share they are willing to pay.

However, while Liquidnet may sweep the blotter to find latent liquidity on the buy-side order management systems, Liquidnet is not allowing software to decide the offering price based on the supply and demand expressed in the electronic offering.

I’m a little surprised that Liquidnet is not pushing the envelope further since it has the backing of the major institutional investors that are its users and tend to be the heavy participants in IPOs. But as media commentators have pointed out, Liquidnet is bucking the trend for IPOs. Given the current slowdown in the market for IPOs and the problems that Google encountered with its electronic IPO, Liquidnet may not want to risk a method that alienated Wall Street’s underwriting establishment.

In August of 2004, after months of hype and warnings surrounding the IPO, Google reduced both the price and size of their offering by 25 percent from an estimated $121.50 to $85 a share. But what hurt Google the most was that its novel offering spurned Wall Street because it cut fees and reduced the role of major brokerage houses in distributing the shares, according to an article in The Washington Post.

On the other hand, because Liquidnet’s business is electronic stock trading, it has a built-in advantage that a dot.com technology company like Google didn’t have. Liquidnet’s 514 buy-side members are among the largest money managers of mutual funds, as well as some hedge funds and pension plans.

Also, Liquidnet relies on its relationships with 22 sell-side firms acting as streaming liquidity providers (SLPs) into Liquidnet H20, an aggregator of fragmented liquidity. Four of the brokers in the underwriting group (Credit Suisse, Goldman, JP Morgan and Lehman) are SLPs listed on Liquidnet’s Web site. They provide buy-and sell-orders via smart order routers that go directly into Liquidnet’s natural liquidity pool without the intervention of human sales traders. So, clearly, excluding the sell-side in this type of market environment is probably not a smart idea.