For example, consider the state vector |y>. The norm <y|y> is invariant under local U(1) transformations
|y> -> e^(-I* T(x,t))|y>
For
<y|y> -> <y|e^(I* T(x,t))e^(-I* T(x,t))|y> = <y|1|y> = <y|y>.
(local, as in a function of space-time, is key). Write the state as |y>=v|0> where v is some operator, then saying <y|y> is invariant is like saying v* v is invariant when v -> v e^(-I* T(x,t)).
In physics, a term ~v* v would represent the potential energy of a spring. To represent the kinetic energy of a spring, we need a term like (d^{\mu}v* )d_{\mu}v where the d_{\mu} represent derivatives w.r.t. space and time (\mu is an index which runs from 0 to 3, 1,2,3 are x,y,z, 0 is time). Here, the U(1) transformation does not leave this term valid, because the derivative acts on the e^(-I T(x,t)) too...
However, if one were to make the replacement
d^{\mu} -> d^{\mu} - I e A^{\mu}(x,t)
where when
v -> v e^(-I* T(x,t))
we have that
A^{\mu} -> A^{\mu} - d^{\mu} T(x,t)
one can show (this doesn't have to be obvious!) that then the Lagrangian
~(D^{\mu}v)* D_{\mu}v - v* v
(where D is the new "covariant derivative" we described above) is now invariant under local U(1) transformations. It turns out that this Lagrangian, completely written out, looks a lot like classical electromagnetism, and it is, and A^{\mu} is the "4-vector potential". In fact, A^0 represents the good old electric potential V that I'm sure you nerds are quite familiar with. I'm not sure how enlightening that was, but at least you've seen the start of QED :)
Now, for this "monster group" ... from here [0] it seems that apparently, gravity in 2+1 dimensions seems dual to this particular group, that is, take the quantum state with that operator |y>=v|0> (v is what we call a creation operator in QFT, it "creates" particles mathematically; in string theory, it creates "vibrations on the string") that under monster group transforms, apparently whatever Lagrangian Witten made out of the v's in conformal field theory (something I should note is not my field, so I may be off here) the gauge group that might be needed would represent gravity.
[0] http://en.wikipedia.org/wiki/Monstrous_moonshine#Conjectured...
But, having heard it, I feel wanting. As you have deftly illustrated, starting with some basic requirements about invariants (from special relativity) you can end up at the Lagrangian associated with QED. And you can then (after the fact!) point out that the field in question is the electromagnetic one. Having studying electromagnetism enough to know what you are talking about, I can hear this kind of argument and it seems clever to me. There is some difference in semantics of the states, of course (classical solution of of the confined electromagnetic field coming in quanta, but perhaps not understood as "quantum observables" proper). But if I had not studied these things I would probably just be confused.
And I think this is how I feel when I hear about this advanced quantum gravity stuff (once again, I don't mean to complain about your excellent response, I think it just addresses a different issue then the one I am talking about).
If you are willing to entertain me, I'll try to ask a clarifying question in terms of analogy. If someone asked me "why does the Lagrangian for QED looks like it does", I might say to them that "the speed of light (light being made of electromagnetic fields) is constant in all inertial reference frames (lets hope they understand Galilean relativity) and that this fact forces QED to look that way". This explanation makes reference to the "stuff" that the field is made out of and the observations about invariants (stated in ordinary language) that it must satisfy.
So, now if I ask "why does the Lagrangian for quantum gravity looks like it does", you would say...
The quantum field theory is then the one living on the worldsheet of the strings, it is the one that describes their embedding in this peculiar space. The monster group turns out to be a symmetry group of this field theory.
This is all conjecturally related to quantum gravity (according to Witten's paper) through the so-called AdS/CFT correspondence which states that field theories are sometimes equivalent to theories of quantum gravity. It has its problems and it remains to be seen if it is really true. (AdS/CFT is fine in itself, the trouble of the conjecture is whether it holds in this particular example.)
A word of warning based on previous experience: this is highly technical stuff and what is mentioned here are just words. Please don't think you can make contributions to this field without seriously studying the equations.
But as I said, since I like connections, I am interested in moving beyond vagaries. In particular I am wondering about this connection to quantum gravity, and I have a few questions to this effect.
If this is about symmetries in a field theory then what is the field in this case? If I see a representation of a permutation group or a special orthogonal group factoring out of operations in a field theory I have some intuition about what this is. So what about this Monster group and what, if anything does this have to do with quantum gravity? Is it a gravity thing? Is it a quantum thing. Both?