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Although the importance of well-developed secondary trading markets for securities is widely known, the economic function of stock exchanges is one of the most poorly understood elements of modem economic life. This lack of understanding of the nature and purposes of organized stock exchanges became particularly obvious in the wake of the stock market crash of October, 1987. On that day, the Dow Jones Industrial Average of New York Stock Exchange listed securities dropped 508 points, and the New York Stock Exchange ("NYSE") lost $1 trillion in value. Similar declines affected other world markets, including the Tokyo Stock Exchange ("TSE"). In the wake of this rapid decline in value, the New York Stock Exchange was singled out for blame as though the price at which securities are bought and sold on that market, unlike others, was determined by the market participants themselves, rather than by more fundamental economic factors, such as new information about the firms whose securities are being bought and sold, or changes in macroeconomic conditions. A central premise of this Article is that market "reform" in the form of new regulation is doomed to failure until the economic functions of organized exchanges are better understood.

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