- Federal authorities should investigate rapid sell-offs like the one that occurred on Christmas Eve because they erode trust in the stock market, says CNBC's Jim Cramer.
- The "Mad Money" host calls for "an investigation about what happened to the American stock dream."
- Machine-driven flash crashes are partly responsible for the flight out of stocks, Cramer argues.
Federal regulators should investigate rapid sell-offs like the one that occurred in the U.S. stock market on Christmas Eve, CNBC's Jim Cramer said Wednesday as strong earnings reports pushed the major averages higher.
"When stocks went into free-fall on thin volume the day before Christmas, that should have prompted officials at the exchanges, maybe [the] Treasury [Department], [the] SEC, to ask what the heck happened," he argued on "Mad Money."
Unlike any kind of sports league, where referees' mistakes often incite outcry from the fans, the stock market isn't always subject to similar scrutiny — and that directly impacts its integrity, Cramer said.
Even though federal bodies like the SEC are tasked with regulating stock market activity, it seems to him like those treacherous trading days tend to slip under their radar. Sometimes, it feels like "the government has abdicated its responsibility entirely," he said.
"Unlike the NFL, which cares about its popularity and its reputation, the people who run the exchanges, for one, clearly couldn't care less — otherwise they'd do something about the erratic way stocks can trade," he said. "Meanwhile, the seats in the stock market stadium grow emptier and emptier every time there's a blown call or a snafu or some crazy action that makes investors feel like the game is rigged against them."
That's how Cramer felt about what he called the Christmas Eve massacre, the market's worst-ever Christmas Eve decline.
With stocks now up roughly 13 percent from those lows, that day can now join the annals of other flash crashes — including May 2010, August 2015 and February 2018 — that "served to undermine our collective trust in the stock market," he said.
The reason these crashes have successfully eroded trust among investors is because they happened for no real reason at all, the "Mad Money" host explained. The 2010 clobbering had no economic drivers behind it, the 2015 drop was caused mostly by computer trading programs; and the 2018 collapse was exacerbated by people trading on volatility that were caught blindsided, he said.
As for the half-day before Christmas, "I bet the true culprit will be related to some fund that had to liquidate before the end of the year, and there just weren't enough buyers on the other side of the trade," Cramer argued.
Still, his bottom line remained the same: "I think there should be an investigation into what happened to the American stock dream."
If there isn't, the "Mad Money" host worried about the longevity of the stock market, which has been a viable and increasingly opportune way for investors to make money in years past.
"How did we let the mechanics drive individual investors away from the market?" Cramer wondered. "Listen, if we want a capitalist democracy, the stock market needs to actually work for ordinary people, not just hedge funds. When regular individual investors can't participate in our greatest engine of wealth creation, let's just say something has gone very, very wrong."
"For now, nobody seems to be upset other than me. Maybe they'll start to care when the seats in the stock market stadium are almost empty," he continued. "Mark my words, that's what will happen if we get a few more of these events, and we know these events are inevitable in a world where the refs have disappeared and the players run wild without a care for what happens to the individual investor."