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Cramer: It’s Time to Embrace High-Frequency Trading

Flash crashes, like the one that happened three years ago, could become the norm, Jim Cramer said Monday.

In 2010, high-frequency trading computers broke down and caused the Dow Jones Industrial Average to plummet nearly 1,000 points in 20 minutes.

At the time, Cramer was studying high-frequency trading—where firms try to get a millisecond edge on other buyers and sellers.

"We used to call [it] illegal front-running," he said, "but [it] has since been accepted by the geniuses at the SEC as totally legal and even positive behavior that gives the markets more depth [and] greater liquidity."

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However, after doing his homework, the "Mad Money" host concluded that high-frequency traders do just the opposite. He realized that there could be a sharp decline in the market if the high-frequency buyers vanished, and the larger firms then backed away. And that's exactly what happened the day of the Flash Crash—buyers vanished and hundreds of billions of dollars were lost.

The U.S. government has since instituted some trading restrictions, but Cramer said he doesn't know if they really work. That's why he thinks flash crashes could continue to happen.

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Cramer's advice? Individual investors should put limit orders, not market orders, underneath their favorite stocks. And he thinks corporate treasurers should make sure their buybacks have orders at every price down.

Since the government has repeatedly endorsed high-frequency trading, Cramer said, it doesn't matter if it produces no value.

"The fact is it's here to stay. Learn to stop hating it, embrace the madness, and profit from it."

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