Dec. 26, 2025

How the Stock Market Actually Works

How the Stock Market Actually Works
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Season 1

In this episode of Smart Money Explained, we break down how the stock market actually works — in clear, simple terms.You’ll learn what the stock market is, why it exists, how companies raise money, and how stock prices are really determined. We also explain the role of exchanges, brokers, institutional investors, and how individual investors fit into the system.This episode focuses on understanding the mechanics of the stock market rather than offering opinions, predictions, or investment advice. The goal is to provide clarity and context so financial headlines and market movements make more sense.This episode is for educational purposes only and does not constitute financial advice.

This episode includes AI-generated content.

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Welcome to Smart Money Explained, the podcast where finance, investing,

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and the economy are broken down clearly and without the hype.

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Each episode delivers practical insights to help you make smarter

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financial decisions, understand what's driving the markets, and think long

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term about money. If you want straightforward financial guidance you

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can actually use, you're in the right place.

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Today. We are undertaking a massive structural engineering project, that's

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a good way to put it. We're going to tear

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apart the common and often you know, fear driven perception

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of the stock market as just this giant, volatile casino.

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Our goal is to reveal the massive, intricate machine that's

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actually functioning underneath. We are going far beyond how to

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buy a stock, to understand this entire ecosystem, the whole thing,

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from the frantic, essential human element on the trading floor

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all the way up to the complex global policy frameworks

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well that hold the entire structure together.

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And this really is a deep dive into architecture. Our

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mission is total clarity on the mechanism, the structure, and

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of course the underlying forces governing global finance.

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And for that we've pulled a really powerful stack of sources.

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Oh yeah, we have everything from the Bureau of Economic Analysis,

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the Federal Reserve, the BLS, the IMF, the NBER, the

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World Bank, the OECD, and a really insightful look at

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the regulatory efforts of the SEC, plus.

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The specific mechanics of the New York Stock Exchange.

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We're going to show you the whole picture.

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I think the best place to start is with the

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most fundamental question, which I feel like often gets lost

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in the noise of daily prices. Why do we even

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have these markets in the first place? What is their

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grand societal purpose?

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The why is profoundly systemic. I mean, if we synthesize

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the high level perspectives from say the OECD and the

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World Bank, the purpose of financial markets isn't primarily individual

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wealth generation.

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That's a byproduct.

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It's a byproduct. Fundamentally, it's about promoting broad, sustainable economic goals.

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These efficient systems are just they're absolutely critical for financial stability.

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So if we look at it through the lens of

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the World Bank, it's about funding things that actually matter, right,

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It's about taking that big pool of global capital and

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directing it toward productive uses.

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That's the engine room of the economy.

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Exactly.

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The World Bank really emphasizes that deep vibrant capital markets

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they fund the long term investment needed to support jobs,

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human capital development, and critical infrastructure projects.

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Things like dams, roads, the.

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Dams, the roads, the communication networks, all of it. When

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financial systems are sound and resilient, they underpin growth and crucially,

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they help alleviate poverty on a global scale.

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The OECD seems to expand that view a bit, looking

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at how well designed markets so import long term sustainable growth.

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What does sustainable actually mean in this context, Well, it.

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Means stability and structure. The OECD stress is that they

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have to provide the essential platform to raise and allocate

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capital efficiently, to manage.

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Risk like through insurance and hedging right.

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And to determine asset prices accurately, and to inform investment

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decisions based on transparency. They explicitly connect this to promoting fairness,

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transparency and define.

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Rules of engagement because without those.

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Without those, you don't foster investor confidence, and the capital

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just stops flowing where it's needed most. It stagnates.

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I really appreciate that distinction. The goal isn't just deficiency,

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it's trust. If capital markets are seen as being rigged,

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they fail in their core societal function of funding jobs

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and infrastructure.

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Precisely, and achieving that trust requires understanding all the moving parts.

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It's a multi layered cake of complexity, as you put it.

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So we're starting right on the trading floor to look

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at the micro mechanics the actual setting of prices, and

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we'll pull back to the macro structures that regulate it

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globally before finally looking at the raw economic data that

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dictates the market's underlying health and value.

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Okay, let's unpack this starting with that core trading mechanism

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described by the New York Stock Exchange. When people picture

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the stock market, you know, they often think of chaos.

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But the NYSE source material highlights a really unique model

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that intentionally resists that drive toward pure, unadulterated speed. So

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we're shifting our focus now from that grand global purpose

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to the nuts and bolts of where prices are actually

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discovered and transactions are completed. And the NYSE model is

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fascinating because it's core philosophy. It kind of runs counter

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to the general trend in modern finance towards speed above

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all else.

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That's the key differentiator. It really is the NYSE explicitly

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prioritizes price discovery and stability over mere execution.

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Speed, So they're not trying to be the fastest.

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Not necessarily. They operate on the staunch belief that nothing

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can fully replace human insight and accountability in critical moment.

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They combine leading technology, I mean, the fastest systems available

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with the required oversight of human judgment, and the goal

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is to create a measurable superior market quality.

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What's the practical difference then, between a system that prioritizes

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pure speed versus one that prioritizes stability. I mean, if

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everything is milliseconds faster somewhere else, doesn't the NYC models

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sacrifice some efficiency.

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Well, they would argue that what you gain instability far

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outweighs any microsecond efficiency loss. Their approach, which they call

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high touch, is designed to result in lower volatility, deeper liquidity,

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and ultimately improve prices for both the buyers and sellers

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of the companies listed there.

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Right, and lower volatility means fewer dramatic price swings from

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say a temporary panic or an algorithmic error. That's crucial

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for a long.

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Term investor, incredibly crucial, and the centerpiece of this high

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touch philosophy is a role that has existed for decades

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but has, you know, very modern obligations. The designated market

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maker or DMM. In the DMM, the DMM is the

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cornerstone roll. These aren't just floor traders. They have specific

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mandatory obligations enforced by the exchange to maintain fair and

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orderly markets for their assigned securities.

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And they work in two worlds at once simultaneously.

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They work manually on the physical floor and electronically through

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their own algorithmic quotes.

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If they are maintaining a fair and orderly market, it

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sounds like they're the market's shock absorber. What are the

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specific circumstances where their human intervention is most critical.

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That's a perfect way to describe it. Their key function

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is facilitating robust price discovery during periods of maximum stress

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or uncertainty. So I think of the market open, the.

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Market close right, the most volatile.

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Times exactly, and any periods of significant trading imbalances like

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when a huge wave of buyer cell orders hits the

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system all at once. A DMM applies their deep market experience,

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their instantaneous judgment of dynamic trading conditions and they say

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the size incoming information.

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So like a surprise Federal Reserve announcement.

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Or industry specific intelligence. Yeah, they do that to ensure

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the market doesn't completely fly off the rails because of

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fear or some kind of algorithmic feedback loop.

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So they are synthesizing real world news and policy changes

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like the data we're going to discuss later from the

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FED and the BLS, and translating that into immediate action

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on the floor instead of just executing some static algorithm exactly.

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And they are required to provide capital commitments.

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Meaning they have to put their own money on the line.

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They have to step in with their own capital to

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buy or sell if it's necessary to stabilize the price

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during instability. That's how they maintain liquidity. They are the

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liquidity backstop. And it's critical to note that while they

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have these obligations, their orders are on parity with orders

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from all other market participants in the electronic system. This

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encourages their essential participation while still holding them accountable.

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That dual approach manual oversight combined with electronic speed it

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shows measure results in the source material, specifically regarding volatility reduction.

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Let's look at those statistics because they directly address the

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core concern of the average investor.

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The data speaks very strongly to the goal of stability.

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The NYC reports that compared to pure electronic trading models,

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their DMM supported high touch approach yields superior market quality,

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especially around major events. For companies newly listed, they are

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get this thirty percent less volatile on listing day.

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Thirty percent. That's huge, especially since IPOs are inherently high

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risk speculative events.

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It's massive. And they are also twenty three percent less

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volatile during lock up expirations.

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Okay, for a listener who might not know the term,

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what is a lockup expiration?

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Right? A lock up expiration is the period usually about

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ninety to one hundred eighty days after an IPO, where

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original investors and company insiders are suddenly allowed to sell

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their shares for the very first time.

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So a flood of sell orders.

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Could hit the market an immense pressure. Yeah, this event

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can just flood the market with sell orders. The DMM's

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presence helps absorb and stabilize that influx.

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And, perhaps most relevant to the daily investor's life, Yeah,

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the stability at the start and end of the.

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Day absolutely essential. The data shows they are fifty one

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percent less volatile at the open and fifty two percent less.

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Volatile at the close fifty two percent.

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And this volatility dampening at the market close is so

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vital for passive investors.

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Why is that.

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Because mutual funds and ETFs calculate their official net asset

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value or NAV, the price at which you can buy

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or sell fund shares based on that closing price. A

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fifty two percent reduction in closing volatility protects billions of

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dollars in passive investments from being exposed to late day

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manipulation or you know, flash crashes.

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That analysis really shows why the stability matters. It's protecting

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the small dollar passive investor from algorithmic spikes or quote

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stuffing at the exact moment their investment value is being

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calculated for the day.

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It connects the microma mechanism directly to macro investor's stability.

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But dmms aren't the only support structure. The market needs

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continuous high volume liquidity as.

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Well, and that's where the supplemental liquidity providers or SLPs

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come in. They sound more like the pure electronic speed merchants.

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Yeah, SLPs are electronic high volume members. They're specifically incentivized,

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meaning they get rebates or favorable pricing structures to add

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liquidity to the exchange.

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And they focus on the big stocks.

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Yeah, they primarily focus on more liquid stocks, generally those

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with greater than one million shares of average daily volume.

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They're the volume drivers, but they also have obligations.

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What are their obligations.

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They are required to maintain a bid or an offer

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at the national best bid or Offer or NBBO for

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at least ten percent of the trading day in their

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assigned securities.

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And the NBBO that's a really critical concept for the listener.

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It is the NBBO is the best available price, the

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highest bid to buy or the lowest offer to sell

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that's available across all exchanges nationally. This rule ensures that

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even the SLPs who are focused on speed are contributing

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to the national standard of best price execution, not just

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internal and YAC liquidity.

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So the SLPs are adding volume and speed, but they're

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still benchmarked against that national best price standard.

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Ye.

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And finally, the iconic role the floor brokers, the people

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we actually see on TV.

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Yes, the agents on the floor. Floor brokers are employees

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of member firms who execute trades as agents for their

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firm's institutional clients, the big hedge funds, pension funds, investment.

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Banks, and they're physically there.

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They are physically present, active participants throughout the day, and

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they play a crucial role in managing those massive orders

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and negotiating during auctions.

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So we have the dmms setting prices and maintaining order,

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the SLPs providing rapid electronic volume tied to the national

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best price, and the floor brokers executing the huge institutional orders.

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That gives us a truly detailed understanding of the micromechanics

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of how this central market place functions and why that

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human element is so intentionally kept in the loop.

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We've established that the dmms successfully handle volatility risk at

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the micro level. But what happens when the risk isn't

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just volatility, it's outright systemic fraud or failure of disclosure

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or macroeconomic instability. Right, that's when we pull back to

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the global and national regulators. If we connect this to

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the bigger picture, we start to see how global policy

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and national regulation ensure integrity and stability outside the trading

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mechanism itself.

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We are pulling back to the watchdogs and the policy

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makers at the national level. For the US investor, that

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means the Securities and Exchange Commission or SEC and its

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consumer facing arm investor dot gov. This is the government

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agency most directly responsible for investor protection.

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Investor protection, and education. That's the SEC's mandate. They provide

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extensive resources to help the public navigate markets safely, and

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they focus heavily on education and vigilance against fraud.

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And for you, the listener, recognizing these red flash is

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arguably the most valuable self protection tool available.

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It really is.

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So let's dedicate some time to detailing the six specific

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red flags of fraud the SEC highlights, because they are

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just essential knowledge for anyone looking to enter or stay

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in the market.

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These six signs are used by fraudsters globally, whether they're

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selling a fake stock, a complex Ponzi scheme, or a

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risky crypto asset.

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Okay, what's number one?

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First, be extremely skeptical of promises of high investment returns

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with little or no risk. This violates the fundamental law

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of finance. Risk and return are intrinsically linked. If a

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guaranteed return sounds too good to be true, it is

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always it is second, watch out for pressure to act now.

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Fraudsters weaponize urgency. This deal closes tonight because they know

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if you stop to do your due diligence, you will

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uncover the lie.

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Third is one we hear a lot about these days,

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fear of missing out or fomo exactly.

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If you feel that emotional twitch, that little pang of anxiety,

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that's your brain signaling the need to step away, away

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from the keyboard and look up the investment on the

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SEC's public search tools.

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What's the fourth?

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Fourth? Fake testimonials. If the person touting the investment is

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using generic praise, stock photos or stories that just sound

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a little too perfect, be skeptical. Real investment success usually

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is an advertised via unsolicited, poorly vetted claims.

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Okay.

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Number five Fifth, promises of great wealth, exaggerated or unrealistic

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expectations are designed to override your common sense. If the

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math doesn't make sense. You know, a triple digit return

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in a slow growth sector, it's a massive warning sign.

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And the final one number six.

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And sixth suspicious payment methods anything that seems unconventional or

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difficult to trace, like demanding payment and untraceable crypto gift cards.

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Or specific offshore wire transfers should raise immediate, huge alarm bells.

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Those six points are just a massive filter. I mean,

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if you apply those to every unsolicited investment opportunity you receive,

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you probably will make ninety nine percent of the junk

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out there.

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Absolutely and beyond just fraud warnings. Investor dot gov provides

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key educational resources for legitimate investment. They cover important topics

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like the crucial necessity of understanding investment fees.

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Which can et away your returns dramatically over.

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Decades dramatically, and the importance of periodically rebalancing your portfolio.

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And for planning. The tools they offer are incredibly practical.

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They are indispensable for long term planning. They provide a

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powerful compound interest calculator to visually demonstrate how money grows

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exponentially over time. They have a required Minimum Distribution Calculator

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or RMD, which is essential for older investors to calculate

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how much they have to withdraw from retirement funds to

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avoid steep IRS penalties, and the Social Security Estimator, and

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they feature the official Social Security Retirement Estimator. This whole

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toolkit reinforces that successful engagement with the market requires robust planning,

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not just trading instinct.

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So the SEC handles the local oversight in individual protection.

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But as we noted capital flows globally, we have to

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look at the powerful global structures like the OECD and

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the World Bank that dictate international financial standards and systemic health.

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Right. The OECD works primarily with developed nations promoting international

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standards to foster global markets that are fair, transparent, and efficient.

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Their work is multifaceted, recognizing that finance intersects with every

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major challenge facing societies today.

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So what are the primary policy areas the OECD is

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focused on in finance and investment.

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While they're busy. First, they focus heavily on financial consumer protection,

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education and inclusion, supporting individual financial well being globally. Second,

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they focus on financial markets themselves, creating sound policies for

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capital markets, encouraging sustainable finance like green bonds, and.

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Managing the rapid growth of digital finance exactly.

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And third, pensions and insurance are vital. They require sophisticated

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guidance on system design and risk management, especially as these

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systems face the twin challenges of population aging and massive

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climate related disasters, which are increasing insured losses.

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That link between climate disaster, insurance risk, and market stability

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is a profound connection the OECD is trying to solve.

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It really shows how complex systemic risk has become. The

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World Bank, meanwhile, shifts the focus more toward development and

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building strong systems and emerging economies.

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And what are the World Bank's core areas of focus

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for financial systems development?

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Their mission is foundational to economic growth and poverty alleviation.

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They focus heavily on financial integrity, working to reinforce global

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systems against dirty money through anti money laundering frameworks and

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asset recovery initiatives.

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So cleaning up the system.

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Cleaning up the system. They also address digital finance and fintech,

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not just the technology, but ensuring it expands financial access responsibly.

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And crucially, they focus on credit.

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Infrastructure, meaning what exactly establishing the.

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Laws and institutions that allow businesses and people to access finance,

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credit reporting systems, collateral registries, robust insolvency frameworks.

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So the World Bank is literally helping countries write the

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legal rule book required to make banking and lending work.

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Safely, precisely, and they prioritize financial stability across lower income countries,

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including banking regulation, supervision, and crisis management, making sure that

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local bank failures don't become systemic threats that choke off

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economic growth.

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It's clear that the global financial system is only as

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strong as its weakest link, and these bodies are working

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to fortify those links. Now, let's step back into national policy,

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but look at its financial impact through legislative oversight. The

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Congressional Budget Office or CBO.

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Right, the CBO doesn't regulate the market, but it provides

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the financial roadmap for every single piece of legislation the

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US Congress considers. Their role is to provide nonpartisan cost

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estimates for legislative acts, demonstrating the profound financial entanglement of

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the market with every policy decision across every single sector.

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In other words, every government action has a price tag,

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and the size of that price tag and how it's

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funded can rattle the entire financial market because it affects

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national debt and fiscal health.

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Correct, the CBO shows the listener that the market's stability

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is not just about financial regulation, it's about legislative discipline everywhere.

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The source material cites examples that illustrate this vast scope.

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They calculate the budgetary effects of bills ranging from the

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American Decade of Sports Act okay, to the Stop Illegal

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Fishing Act and the Lower Healthcare Premiums for All Americans Act.

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Sports Fishing and Healthcare. I mean each of those disparate

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policies requires an expenditure or changes the revenue structure of

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the government, which impacts a national budget, which in turn

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influences market sentiment about long term fiscal stability. It really

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is all connected under the CBO's calculation. Here's where it

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gets really interesting. We've talked about the exchange mechanics and

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the regulatory framework. Now we dive into the actual substance

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that drives the market, the real economy and the powerful

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actions of central banks. The stock market just doesn't exist

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in a vacuum. It is ultimately tethered to economic reality.

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The regulatory framework is meaningless if the underlying economy isn't

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producing value. Market health depends entirely on comprehensive, granular data

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points that measure national activity, the macro level pulse, and

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we have two key providers for that, the Bureau of

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Economic Analysis the BA and the Bureau of Labor Statistics

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the BLS.

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Let's clearly delineate their roles because I think they are

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often confused. The BA is focused on the big picture

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of national output. Correct.

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Yes, the BA is the National Accounts report Card. They

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provide the overall health metrics. Key topics include gross domestic

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Product GDP, which is the primary measure of economic output,

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consumer spending, income and saving, prices, and inflation and investment

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in fixed assets.

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So these data points tell us how fast the economy

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is growing, the capacity for future growth, and whether inflation

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is coming from rising consumer demand Exactly.

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While the BEEA gives us the overall report card, the

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BLS gives us the inflation and employment siever chart. These

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are the data points that the Federal Reserve watches most

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closely when deciding monetary policy.

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Absolutely, the BLS data topics are among the most highly

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anticipated and market moving releases every single month. They cover

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inflation and prices, specifically the Consumer Price Index the CPI,

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which tracks costs for consumers, and the Producer Price indexes PPI,

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which tracks costs for businesses. They also measure the full

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scope of the labor market, including unemployment, national, state and

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local rates, employment projections, productivity, and business employment dynamics.

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MARCH participants use the BLS data to predict consumer health

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and future corporate earnings. If inflation is high, the FED

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will react. If unemployment is low, that can spur inflation.

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The data is the fuel, It's.

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The input for all the valuation models. If the cost

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of inputs the PPI is rising, corporate margins are squeezed.

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If labor markets are tight, wage cost frise. This all

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directly impacts the stock prices that the dmms are trading

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on the NYC floor.

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And someone has to act on all this complex data

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to maintain stability and meet their dual mandate that is

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the Federal Reserve. Their influence is perhaps the single biggest

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driver of the macroeconomic environment for asset prices globally.

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The fed's mandate is explicit and powerful to promote maximum employment,

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stable prices, and moderate long term interest rates. They don't

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just set a single rate. They influence the entire cost

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of capital through a variety of tools that I think

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require some detailed explanation.

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They really do.

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So let's break down those core mechanisms because truly understanding

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how the FED works is key to understanding the underlying

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foundation of the stock market.

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Okay, we'll cover the five major tools the FED utilizes first,

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and this is historically the most common are open market

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operations or fomos.

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What are those?

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This involves the buying and selling of US government securities

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in the open market. When the FED buys bonds, it

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injects reserves into the banking system, which increases liquidity and

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pushes down the Federal Funds.

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Rate, which is the rate banks charge each other for

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overnight lending.

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Exactly when they sell bonds, they drain reserves, tightening liquidity

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and pushing the rate up. This is their direct lever

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on short term interest rates.

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It's literally the action of adding or subtracting money supply

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from the system. What about the discount window and discount rate.

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The discount window is a standing offered by the FED

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to lend money directly to depository institutions. The discount rate

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is the interest rate charged on those loans. This acts

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as the lender of last resort. So if a bank

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is in trouble, if a bank is experiencing a temporary

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liquidity crunch, they can go to the discount window. Since

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the discount rate is usually set higher than the Federal

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funds rate, borrowing here often carries a slight stigma, signaling

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that the bank couldn't get money cheaply elsewhere, but it's

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a crucial backstop for systemic stability.

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Next, reserve requirements the percentage of deposits banks must hold

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in reserve. This once a primary tool, but its role

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has changed, hasn't.

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It It has shifted dramatically. Historically, the Fed would raise

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or lower reserve requirements to change the amount of money

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banks could lend out. Today, due to the massive influx

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of reserves following various crises, most large banks have far

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more reserves than required, rendering this tool largely ineffective for

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daily monetary policy control.

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So it's not really a lever they pull.

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Anymore, not in the same way. It's now technically set

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at zero for all banks, which signals the FED has

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moved away from using it as a primary control lever.

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Okay, So if reserve requirements are largely sidelined, how does

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the Fed actively influence the short term rate that brings

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us to Interest on reserve balances or iorb.

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IRB is arguably the most powerful modern tool. The FED

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pays banks interest on the money they hold on deposit

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at the Federal Reserve. By raising the IORB rate, the

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FED incentivizes banks to hold more money at the FED

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rather than lending it out cheaply.

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Ah. It sets a floor into the federal funds rate.

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It sets a floor. If the FED wants to increase

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the cost of money for everyone, they raise the IORB,

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and that pulls all short term rates up with it.

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It's a subtle but immensely powerful mechanism.

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And finally, the lesser known fifth tool the term deposit

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facility right.

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This is a mechanism that allows the FED to manage

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aggregate reserve balances. They offer interest bearing term deposits to

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eligible institutions. It's another way for the FED to temporarily

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lock up liquidity in the system, absorbing reserves when they

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need to tighten financial conditions, without relying solely on Homo's

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or IRB.

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These five tools, combined with the Fed's massive intellectual engine,

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they shape the very cost of capital, determining how companies

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invest in, how investors.

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Value them, and their policy decisions are informed by highly

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specialized research circulated through key publications like the Finance and

490
00:25:52.839 --> 00:25:57.559
Economics Discussion Series FADS Working Papers and the International Finance

491
00:25:57.599 --> 00:25:59.960
Discussion Papers IFDP working Papers.

492
00:26:00.119 --> 00:26:03.599
These are just simple memos there's sophisticated economic modeling absolutely.

493
00:26:03.960 --> 00:26:07.240
For instance, an IFDP paper might model the impact of

494
00:26:07.279 --> 00:26:10.759
global trade tariffs on currency flows, while a FITTS paper

495
00:26:10.839 --> 00:26:14.400
might analyze something like estimating data center investment and its

496
00:26:14.440 --> 00:26:15.720
impact on productivity.

497
00:26:15.799 --> 00:26:18.599
That gives you the listener a tangible sense of the

498
00:26:18.680 --> 00:26:22.079
depth they are modeling every single variable that feeds into

499
00:26:22.119 --> 00:26:26.000
the macroeconomy. Stepping out to the global academic community, we

500
00:26:26.079 --> 00:26:29.039
also have research centers like the IMF and the NBER

501
00:26:29.640 --> 00:26:30.880
providing crucial context.

502
00:26:31.079 --> 00:26:35.079
The IMF provides that crucial global context, especially for interconnected risk.

503
00:26:35.319 --> 00:26:38.960
They release the Global Financial Stability Report, which assesses risks

504
00:26:38.960 --> 00:26:42.240
to the global financial system, things like sovereign debt levels,

505
00:26:42.599 --> 00:26:46.119
excessive leverage and shadow banking, or the stability of emerging

506
00:26:46.160 --> 00:26:47.440
market capital flows, and.

507
00:26:47.359 --> 00:26:49.960
They look at the big modern challenges they do.

508
00:26:50.240 --> 00:26:54.160
They also research massive cross border topics like the fiscal

509
00:26:54.200 --> 00:26:57.519
policy needed to adapt to climate change and the systemic

510
00:26:57.599 --> 00:26:59.640
risks posed by unregulated fintech.

511
00:27:00.119 --> 00:27:03.759
And the NBER, the National Bureau of Economic Research, acts

512
00:27:03.799 --> 00:27:07.680
as the leading circulation point for academic thinking, often before

513
00:27:07.720 --> 00:27:10.960
it's even peer reviewed and published informal journals. This is

514
00:27:10.960 --> 00:27:14.839
where the newest intellectual theories about market structure and valuation begin.

515
00:27:15.559 --> 00:27:19.480
The NBER circulates over twelve hundred working papers each year.

516
00:27:19.720 --> 00:27:22.440
They are the initial testing ground for cutting edge economic

517
00:27:22.480 --> 00:27:25.480
theories that will inform policy and market analysis years down

518
00:27:25.480 --> 00:27:28.319
the line. Their key working groups relevant to the market

519
00:27:28.440 --> 00:27:32.400
include asset pricing, how things are valued exactly, corporate finance,

520
00:27:32.440 --> 00:27:35.960
which is how firms raise and allocate capital, monetary economics,

521
00:27:35.960 --> 00:27:39.200
the intact of central banking, and the extremely insightful field

522
00:27:39.200 --> 00:27:44.200
of behavioral finance, which studies investor psychology, the irrational human

523
00:27:44.240 --> 00:27:47.720
element that can often override the stable mechanisms we just discussed.

524
00:27:47.880 --> 00:27:49.880
So if you want to know what the academic community

525
00:27:49.920 --> 00:27:52.799
is thinking about the future of, say the DMM role

526
00:27:52.839 --> 00:27:56.160
in the NYSE floor, you might find the initial theory

527
00:27:56.200 --> 00:27:59.960
in an NBER working paper. Today, it's the intellectual fiel

528
00:28:00.359 --> 00:28:02.680
for the entire financial engine.

529
00:28:02.720 --> 00:28:06.640
We have successfully spanned the entire market ecosystem, from the

530
00:28:06.680 --> 00:28:11.480
microauction floor stabilized by human judgment, to the macroeconomic data

531
00:28:11.519 --> 00:28:14.680
that determines value and the central bank policy that maintains

532
00:28:14.680 --> 00:28:18.279
the foundation. It's time to synthesize these layers and bring

533
00:28:18.279 --> 00:28:20.440
it back home to the individual learner.

534
00:28:20.720 --> 00:28:23.039
The power of this deep dive is truly in connecting

535
00:28:23.079 --> 00:28:26.640
the docks between those three major layers, the physical mechanism,

536
00:28:27.000 --> 00:28:30.880
the global regulatory shield, and the economic undercurrents. We really

537
00:28:30.920 --> 00:28:32.400
need to see how they rely on each other.

538
00:28:32.559 --> 00:28:35.960
For instance, the efficiency of capital allocation, a core societal

539
00:28:35.960 --> 00:28:38.519
goal cited by the World Bank and the OECD for

540
00:28:38.559 --> 00:28:42.240
funding infrastructure and jobs, is fundamentally reliant on the stability

541
00:28:42.279 --> 00:28:45.759
offered by the nys's DMM and human insight model. If

542
00:28:45.759 --> 00:28:50.319
the market is characterized by wild, unpredictable swings, capital becomes

543
00:28:50.400 --> 00:28:54.079
risk averse. It won't flow efficiently into the productive long

544
00:28:54.160 --> 00:28:55.640
term investments that need it most.

545
00:28:56.119 --> 00:29:01.039
Stability is productive and the intrinsic value of any specific investment.

546
00:29:01.160 --> 00:29:04.599
The stock price, which is the subject of that NYC auction,

547
00:29:05.319 --> 00:29:09.160
is fundamentally connected to broad economic health data. If the

548
00:29:09.240 --> 00:29:13.160
BEA's GDP figures are weak, if the BLS's employment data

549
00:29:13.160 --> 00:29:16.960
suggests recession, even a perfectly regulated company will struggle for

550
00:29:17.079 --> 00:29:18.640
valuation stability.

551
00:29:18.200 --> 00:29:22.920
Absolutely, as the NBA's Asset Pricing Group confirms, valuation ultimately

552
00:29:22.960 --> 00:29:26.240
comes down to expected future cash flows, which are tied

553
00:29:26.279 --> 00:29:28.079
directly to the health of the macroeconomy.

554
00:29:28.119 --> 00:29:31.160
Exactly, and the entire system relies on the predictable foundation

555
00:29:31.240 --> 00:29:34.519
delivered by the Federal Reserves. Monetary policy. Stable prices and

556
00:29:34.599 --> 00:29:37.240
moderate long term interest rates are the bedrock upon which

557
00:29:37.319 --> 00:29:41.359
all asset prices, all corporate investment decisions, and all individual

558
00:29:41.400 --> 00:29:44.680
retirement plans are built. When the Fed moves, everyone moves.

559
00:29:44.960 --> 00:29:49.160
So after seeing this robust, complex and highly regulated machinery

560
00:29:49.200 --> 00:29:52.799
underneath the surface, what is the ultimate responsibility of the investor,

561
00:29:53.319 --> 00:29:55.960
because the system is designed to protect them, but it's

562
00:29:56.000 --> 00:29:56.839
not fool proof.

563
00:29:57.400 --> 00:30:01.160
Well, the ultimate responsibility lies with the individual to remain informed,

564
00:30:01.440 --> 00:30:04.799
to utilize the free tools provided by regulators like investor

565
00:30:04.839 --> 00:30:08.160
dot gov, and to remain highly vigilant against attempts to

566
00:30:08.200 --> 00:30:09.599
exploit the system for fraud.

567
00:30:10.039 --> 00:30:12.319
Let's review those six red flags of fraud from the

568
00:30:12.359 --> 00:30:15.920
SEC one final time, framing them as your primary defense

569
00:30:16.000 --> 00:30:18.160
mechanism against illicit activity.

570
00:30:18.839 --> 00:30:21.359
Be skeptical of any pitch that removes the need for

571
00:30:21.400 --> 00:30:24.880
trade offs, promises of high investment returns with little or

572
00:30:24.920 --> 00:30:25.400
no risk.

573
00:30:25.759 --> 00:30:28.240
Never succumb to the urgency of pressure to act. Now,

574
00:30:28.559 --> 00:30:29.759
just take a day to think about it.

575
00:30:29.920 --> 00:30:32.799
Recognize the psychological trigger of the fear of missing out

576
00:30:32.920 --> 00:30:35.920
or FOMO and use it as a signal to exercise caution.

577
00:30:36.400 --> 00:30:40.200
Don't base your decisions solely on generic or fake testimonials,

578
00:30:40.519 --> 00:30:42.559
Trust verified information, Be.

579
00:30:42.640 --> 00:30:45.000
Wary of any offer that gives you promises of great

580
00:30:45.039 --> 00:30:47.559
wealth that defy rational economic models.

581
00:30:47.599 --> 00:30:51.400
And instantly disconnect from any investment pitch that requires suspicious

582
00:30:51.440 --> 00:30:52.319
payment methods.

583
00:30:52.519 --> 00:30:54.599
This deep dive has shown that the stock market is

584
00:30:54.680 --> 00:30:58.079
less about instinct and random chance and more about engineering,

585
00:30:58.240 --> 00:31:03.440
data and deliberate layers regulation. It's a massive structure designed, however,

586
00:31:03.480 --> 00:31:08.039
imperfectly to allocate resources efficiently across the globe while providing

587
00:31:08.119 --> 00:31:09.240
necessary stability.

588
00:31:09.599 --> 00:31:13.200
It is an incredible piece of economic infrastructure, but that

589
00:31:13.279 --> 00:31:16.440
leads directly into the core tension we've seen reflected throughout

590
00:31:16.480 --> 00:31:18.960
our source material, especially concerning the future.

591
00:31:19.200 --> 00:31:23.119
That tension is reflected between the physical human centric systems

592
00:31:23.240 --> 00:31:27.519
like the NYCDMMS damping volatility through manual intervention, and the

593
00:31:27.640 --> 00:31:31.559
rapid borderless evolution of digital finance and fintech, which the

594
00:31:31.559 --> 00:31:34.640
World Bank and IMF are so heavily focused on regulating.

595
00:31:34.920 --> 00:31:37.000
We have human judgment trying to keep a lid on

596
00:31:37.039 --> 00:31:41.559
stability in a world increasingly dominated by algorithmic split second trading,

597
00:31:41.759 --> 00:31:45.599
the rise of AI driven strategies and novel digital assets

598
00:31:45.599 --> 00:31:47.319
that trade twenty four to seven globally.

599
00:31:47.599 --> 00:31:50.519
So the question for you, the learner, to consider as

600
00:31:50.519 --> 00:31:54.160
you navigate this market is precisely this. How long can

601
00:31:54.240 --> 00:31:57.839
human judgment remain the primary dampener of volatility in an

602
00:31:57.920 --> 00:32:03.119
increasingly automated and digitally integrated global market As capital flows

603
00:32:03.160 --> 00:32:06.599
become instantaneous and AI driven, Does the concept of a

604
00:32:06.680 --> 00:32:10.200
human specialist on a physical floor maintain its power or

605
00:32:10.240 --> 00:32:14.000
will regulation need to fundamentally evolve to a purely algorithmic

606
00:32:14.079 --> 00:32:18.079
oversight model capable of keeping pace with the technology. That

607
00:32:18.240 --> 00:32:21.000
is the structural challenge that lies ahead for every regulator

608
00:32:21.000 --> 00:32:22.759
and central banker we discussed.

609
00:32:22.359 --> 00:32:25.039
Today a fascinating tension to watch is you navigate your

610
00:32:25.039 --> 00:32:28.200
own portfolio and follow the policy decisions of the Federal

611
00:32:28.200 --> 00:32:30.880
Reserve and the SEC. Thank you for joining us for

612
00:32:30.920 --> 00:32:33.279
this deep dive into how the stock market actually works.

613
00:32:33.480 --> 00:32:34.839
We hope you feel thoroughly informed.

614
00:32:34.920 --> 00:32:35.599
Until next time.

615
00:32:35.920 --> 00:32:38.400
Thanks for listening to Smart Money Explained.

616
00:32:39.000 --> 00:32:42.079
If you found this episode helpful, follow the show so

617
00:32:42.119 --> 00:32:47.119
you don't miss future episodes covering investing, markets and personal finance.

618
00:32:47.720 --> 00:32:51.519
This podcast is for educational purposes only, and does not

619
00:32:51.720 --> 00:32:53.519
constitute financial advice.

620
00:32:54.359 --> 00:32:56.359
We'll see you in the next episode.