I am quite comfortable with the fact that this is a political problem. Because, as I have noted elsewhere, political problems are somebody's fault, and can be rectified by removing the somebody whose fault it is and replacing him with someone who isn't a problem.

Or not. That's the rub, isn't it? If it's purely a political problem, then to solve it one has to convince one's compatriots to vote in the way that one would like them to vote. How's that been working out for the last 30 years? For that matter, how did that work out in the years since 2000?

I continue to believe that a serious deterioration is first necessary to focus people's minds. I hope I'm wrong.

Ban OTC transactions and enforce a Tobin tax on all on-exchange transactions.

Ban OTC? How are you going to do that? Those are essentially private agreements between two parties. Would you like any two companies who wish to enter into any contract to ask the government regulator for permission first? You can shut down the OTC Bulletin Board and you could outlaw any contract which contains the words over-the-counter if you like, but what is that going to accomplish realistically? OTC is not the actual stock exchange, and the same can be accomplished by two people sitting in an office to sign a document, or two computers talking to each other directly. Worse, derivatives are not usually about trading stock directly, but about rights and obligations regarding the behaviour of people and companies owning stock. It's meta. It's an agreement about what the parties will do at particular event times.

Modern replication strategies are a bug, not a feature.

Why? A replication strategy is only a sequence of trades, such as any person might do. The difference is in the player's mind. Whereas a casual investor has no idea what the end result of his investment strategy will be, beyond a nebulous hope of increasing his wealth, the replication strategy is designed to create a specified function of the underlying stock. That's all.

Any sequence of trades over time generates some function of the underlying stocks, bonds, etc. If you can write down what function you would like to get, then it is a matter of solving an engineering style control problem to get an approximation of this function within the feasibility constraints represented by the number of allowed trades and asset classes. In other words, you could have a stock market that allows a single time tic per day, or any number of silly constraints, and you could replicate regardless.

How do you control what's in a person's mind? How do you argue politically that companies cannot choose what to buy or sell when they want to? How do you convince your compatriots to vote for somebody who will impose those restrictions? It doesn't sound easy to me.

Under a Tobin Tax scheme, individual participants can have precisely the amount of liquidity that they are willing and able to pay for.

And Tobin concerns exchange trades only, right? What private companies agree between each other about what they will or will not do on the exchange is not covered, right?

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$E(X_t|F_s) = X_s,\quad t > s$