Jim Cramer slammed high-speed trading on Tuesday, calling it a “scourge to the individual investor.”
The “Mad Money” host’s comments came after the Federal Reserve Bank of Chicago called for more stringent risk controls at all levels of the high-speed trading cycle. In a letter released Monday, the Chicago Fed suggested a limit on the number of orders that can be sent to an exchange within a specific time frame; a "kill switch" that could stop trading at one or more levels; and profit-and-loss limits that restrict the dollar value that can be lost.
“While I am pro-progress, not all innovation is for the betterment of mankind,” Cramer said, arguing that genetically-modified food and nuclear energy is also the product of progress, but both are controversial, too.
“We have seen what happens in war when one side’s technology overwhelms the other. You can lose 60,000 men in a morning, as the Brits in World War I, when, on the first day of the Battle of the Somme, they sent their armies over the top and right into the progress of machine guns that made mincemeat of them,” Cramer continued. “To me, right now, the high-speed traders are this generation’s equivalent of the German machine guns that mowed down British soldiers by the thousands and the people being annihilated by the traders? That’s you, the average investor, just trying to using stocks to save some money as generations have before you.”
In Cramer’s opinion, high-speed trading can be blamed for the “flash crash” of May 2010, Facebook’s botched initial public offering in May, as well as the trading glitch that punched a $440 million hole in Knight Capital Group's balance sheet and nearly sank the firm last month. Sadly, though, Cramer said few government regulators seem to care – that is, except for the Chicago Fed.
(Related: What Cramer's Watching This Week.)
Cramer would have liked the Chicago Fed to require short sellers to wait for higher prices before they should crush a stock. He also thinks the double and triple exchange-traded funds should be questioned because they can take stocks sharply higher or lower “beyond comprehension.” But he’s just happy at least one branch of the government is finally addressing the issue of financial engineering at all.
“The government isn’t oblivious to the wily nily embrace of financial engineering that benefits the high-frequency traders and hurts you,” Cramer concluded. “The government recognizes that while progress can be good, not all innovation breeds progress. It’s just that the branch of government that’s wise to the problems, the Chicago Fed, isn’t the one that matters.”
Read on for Cramer's Top Dividend Stocks 2012
—Reuters contributed to this report
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