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PMFJI,

Do you believe that the price of a November future on an ounce of gold at the close of trading tomorrow is determined by chance?

Hmmm... I think it is determined partly by chance. Every trader who puts in a market order is making a bet that their order will trade "somewhere" near the last quote they saw, "sometime" in the near future. And the Level II traders (or stock specialists) may see the outstanding limit orders, but they still have no idea how many buy or sell orders are floating out there in the minds of all the traders who are sitting at home at their computers.

I wonder: Has anyone ever modeled a market where only limit orders & stops can get placed? That would seem like a more deterministic system than one with some market orders always coming in over the transom.

Such a system could look like the theoretical marketplace where every market participant announces a binding declaration of how much they'd pay for each product being offered by all the manufacturers out there. This, of course, is the kind of assumption (that you could poll people to determine what "reasonable" prices & production quotas are) that leads overly arrogant economists to believe that they can rationally predict (& therefore control) prices & wages & production according to 5-year government plans.

So, I suspect that you couldn't have a true marketplace if the individual pricing decisions that make it up were totally determined. Interesting. Whaddya think?

I'm not sure. I think one could still have a true market in which the individual pricing decisions were deterministic: replace each trader with a computer programmed to make pricing decisions according to a deterministic algorithm implementing the kind of heuristics traders actually use (each with a slightly different algorithm). I don't think that doing this would disturb the dynamics of the market, and absent knowing what all the algorithms are, would still leave the best model (for options at least) as Black-Scholes, complete with its stochastic element.

At least someone took the question seriously. DoctorStochastic decided I was being rude and evasive rather than making a rhetorical point. He seems to have not absorbed the point of my original post, that stochastic elements in a theory do not banish purposeful intent from the process being described, as the loudest polemicists on either side of the public debate seem to believe.