The central bank of the United States, which sets short-term interest rates, supplies bank reserves, and acts as lender of last resort to the banking system.
The Federal Reserve does three jobs that touch traders. It sets monetary policy through the fomc, which moves the federal-funds-rate and therefore moves every asset you trade. It supervises bank holding companies and many state member banks. And it writes the credit rules that govern securities lending to customers, most visibly regulation-t.
Traders often forget that third role. The 50% initial margin requirement on a stock purchase is a Federal Reserve rule, not a broker rule or an sec rule, even though finra and the broker layer stricter requirements on top of it.
The Fed is not an investor protection agency. It does not police fraud, register brokers, or handle your complaints. Those belong to the SEC, FINRA, and the cftc depending on the product.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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