The South Sea Bubble and the SEC

Thursday, 6 January 2011 00:01 - - {{hitsCtrl.values.hits}}

The SEC has not resorted to price controls on shares recently and the speculators seem to have returned in full strength. But driving the prices of particular shares way above their fundamentals and then selling them and later dumping them by shrewd speculators seems to have revived.

Our investors don’t seem to be aware of the South Sea Bubble. The South Sea Bubble took place in 1720 in UK. The prospectus of the company to invite investors to invest was interesting. “It is a company for carrying out an undertaking of great advantage but nobody knows what it is.” The company gave loans to its shareholders to buy shares and more and more shares were sold. But no value was created and the company collapsed.

The SEC should instead of stamping price controls find out how some investors and investment trusts connected to some companies and even some brokers keep on buying shares at higher and higher prices. They then bail out leaving the smaller investors holding the shares.

Buying shares at higher and higher prices is prima facie evidence of market manipulation. But this is a prohibited practice only for stock brokers.

The SEC should examine the names of those investors particularly the investment companies and ask them why they resort to this practice without placing the order once and for all hiding the permitted percentage. Those identified should then be registered separately with a deposit payment large enough to check excessive gearing.