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Senator Kaufman Talks 'Flash Crash'

Tuesday, 25 May 2010 | 7:39 PM ET

It is unclear what caused the 'flash crash' on May 6, but Cramer said regulatory changes favoring faster trading helped make it possible.

Those changes included allowing "ETFs of mass destruction" and high-frequency trading, Cramer said, while repealing the uptick rule. Money managers have used those ETFs, or double- and triple-levered exchange-traded funds, to get around margin rules and drive down stocks with massive selling firepower. Without the uptick rule, which required a stock to tick up in price before it was sold short, traders can relentlessly hammer down stocks. And high-frequency traders are able to use machines that turn their portfolios 11 times in 10 seconds.

How can retail investors protect themselves against all this? It’s virtually impossible, Cramer said, because the Securities and Exchange Commission hasn’t done its job. Sure, it has proposed a circuit-breaker rule, where individual stocks in the S&P 500 would stop trading if they fell more than 10% in five minutes, but the proposal exempts the ETFs responsible for the "real damage."

Flash Forward
Cramer tells you where to go from here after another day in freefall, with Sen. Ted Kaufman, (D-DE).

On Tuesday's Mad Money, Cramer spoke with Senator Ted Kaufman, D-Del., a leading voice on these issues, to find out if we could expect much-needed changes from Washington. Watch the video for the full interview.


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