I knew you could do much better than me with the stock market regs. Your transaction tax works much better than my hold time limit, though such a tax is a significant “camel’s nose under the tent flap” issue, because the financial transaction tax is one of the holy grails of world communism/socialism/progressiveism. An alternative approach could mandate a special per-share fee paid to the market-maker for short-duration transactions, or maybe just a minimum transaction fee, period. Such a fee doesn’t hurt legitimate investors but still makes HFT unprofitable. Not to mention that the market-makers themselves would be onboard for such a proposition.
And you accurately point out the problems with my simplistic futures proposals. Perhaps buyers and producers of physical commodities could be certified somehow before being allowed to trade, that is, they must offer some kind of proof that they do or intend to produce or that they do or intend to consume.
However, I still see no truly useful purpose for naked calls and puts other than for leveraged gambling.
If we were in a meeting room, I could explain the purposes of naked option positions much better than just typing it out. Options aren’t bad instruments, and many small investors would do much better at investing if they learned to use them.
I use naked put positions on stocks all the time. When a stock has gone down hard in a relatively short amount of time, (example: AAPL), one way you can try to buy the stock even more cheaply would be to write a naked put. The historical volatility (ie, the rapid decrease in price) is part of what will make the put’s price go up over the short period of time - eg, look at put options under the current price of AAPL. You see that they have very lush valuations.
OK, so let’s say that you want to buy AAPL at a cheaper price than now? Write a naked put under the current price. If the price of AAPL continues lower, you might get assigned (forced to buy shares of AAPL at the strike price), but you also get to keep the option contract price, which effectively reduces the price of buying the stock.
Real numbers from today’s close: Stock price of about $455.
Let’s say you want to get AAPL at something closer to $400, effective price. OK, let’s look at the options for a June expiration, which gets you a pretty nice piece of time decay in the option contract. Write naked options expiring June 21st for a $415 strike, and you get a premium of $12.35/share. If AAPL gets down to $414.90 or lower and stays there into June 20th, you’ll get assigned, (ie, forced to buy X shares of AAPL at $415) and you get the $12.35/share premium to keep, which brings down your cost of buying those shares to closer to $400.
If you want to eliminate “leveraged gambling,” then you’d have to go after not only naken options, but also single stock futures, various ETF futures (like the SPY futures) and various index futures. Futures in stocks and financial instruments are closer to gambling than options, IMO, because options have other purposes than just speculation. Options are ways of capturing and buying/selling volatility, hedging, forcing buys or sales of stocks, etc.
As for transaction tax vs. hold time limit - I’d prefer that a bid has to remain up on the tape for at least a minute or something similar. It’s a pretty simple fix and it guts HFT straight away. The transaction tax could also be used to make various bespoke (non-listed) instruments effectively non-profitable and eliminate them from the markets, but I agree with your assessment that it’s a camel’s nose of a thing.