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Terminator: No Salvation?

It’s man versus machine in the markets, Cramer said Tuesday, and the machines will win. So investors, especially retail investors, should act accordingly.

“The parasites—they’re here to stay,” he said.

Cramer’s been a critic of high-frequency trading, where computers shave micro-profits off countless market transactions, since the May 6 “flash crash.” That’s when the Dow plummeted nearly 1,000 points in mere minutes because the machine operators exited the market en masse, taking many stocks down in the process. Sure, there’s been much talk since then about regulating high-frequency trading, and Cramer has been calling for it himself, but he doesn’t think it will happen.

The institutions behind these trades are “too powerful,” he said. “They have too much money and too much on the line.” They’ve convinced the powers that be, i.e., the Securities and Exchange Commission, that machines make the markets fairer and provide much-needed liquidity. And when opponents speak out against them, the institutions deride their critics as luddites who lack the sophistication to understand how modern-day trading works.

It’s a win-win for them that has amounted to big losses for the rest of us. Sadly, Cramer doubts anyone—from the exchanges themselves, most brokers, mutual funds—cares enough to keep these machines in check. Apparently, there’s money to be made regardless of how it affects retail investors.

Worst of all, we still don’t know what happened on May 6. Not officially, anyway. Cramer blames the machines, but we don’t yet have verifiable proof as to why Accenture traded to $0. Or why Procter & Gamble dropped to $38 from $62. Or 3M slipped to $68 from $88. Plus, the government never explained its reasoning for canceling all trades in stocks that fell 60% from before flash crash took place.

“Here's my take,” Cramer said. “Until we do know how it happened, until we actually have the people who are running the machines open up and tell us what went wrong, we are all still vulnerable.”

This doesn’t mean you cash out and leave the market entirely, though. Cramer still believes that high-quality stocks with dividends, and the reinvesting of those dividends, offer the best way to augment your paycheck.

The survival strategy then is to use only limit orders, where you set your price for a particular sale, when buying and selling stocks. For example, had a shareholder of PG put in a limit order for a sale at $61.50 when the stock was trading at $61.60, the holder would have been spared the precipitous drop that followed, however brief it was. A market order, though, where a broker merely tries to get you the best available price at a given moment, might have resulted in the same sale at $48, generating huge losses for the shareholder.

Cramer’s golden rule in this case: Put in an order about 10 cents lower than the present market price. That way the trade gets done without any damage to your portfolio.

Of course, this works on the buy side as well. Cramer was on air during the flash crash on May 6 and recommended viewers place a limit order to buy PG at $49.25 when it was trading at $48. Anyone who did made money once the market regained its equilibrium. But a market order placed at the same time could have resulted in a purchase at the $60 level, virtually eliminating any chance to earn any profits.

“The machines are here to stay,” Cramer said. “They won't be turned off; they probably won't even be modified. But you can still triumph over them if you protect yourself with limit orders. It's a small victory, but it will keep you from being terminated like so many others who bought or sold that last stock on that brutal flash-crash day.”

When this story published, Cramer's charitable trust owned Accenture and Procter & Gamble.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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