By Callum Ruddock.
Quantum technology is coming of age. With viable products and service solutions entering the market within 3-5 years [1], it is time that the financial sector started thinking about their quantum readiness. Customers now demand faster, more robust, and more secure fiscal products. If the Industry intends to deal with this demand it should turn towards the quantum world. The manifestation of which represents both risk and significant benefit.
Qualifying Quantum in Fintech
The financial service industry has a history of early adoption. It took to computing revolution confidently and for the most part has successfully utilised computers to turn to a profit. An increasing number of trades are being done at high frequency by complex algorithms without human intervention. Banks can now execute orders on stock and future exchanges in milliseconds, and some trade even faster than that, relying on their speed and agility for competitive advantage [2].
Quantum computing technology then, represents the logical step forward from the conventional high-performance computing methods typically employed to assist in such a process. It will likely transform the way financial world operates; helping stem the need for big data across our banks and other financial institutions.
Financial Analysis
Risk and investment strategy is at the core of financial services. Finance is now about decision making and considering variables. The ability of quantum computers to efficiently process vast numbers of calculations simultaneously presents those involved with these markets a means to chew data and build models with a higher level of accuracy, at a faster speed, whilst operating a reduced computational load when compared with traditional computing methods.
Tasks like derivative and option pricing can be completed in a shorter time. Investment managers may be able to rebalance portfolio investments at higher speeds; thus respond to market forces more precisely. Quantum computers will be well suited to recursive tasks such as scenario analysis where the risk of one event happening is dependent on the probability of occurrence of multiple other events. Risk analysis functions can also be enhanced by quantum technologies. Metrics like conditional value at risk (CVaR) can be optimised by quantum processes, which, despite the primitive maturity of these technologies, have already been shown to lead to faster convergence and better solutions [3].
Some industry experts [4] expect Quantum Monte Carlo (QMC) methods to be the first deployed and the first to generate significant generation/cost savings for the financial sector.
“We should be really excited about the potential for integrating financial tools in the quantum software stack”, said Dr. Jayne Thompson [5] speaking with SGInnovate and the High Commission of Canada. “In particular we know quantum computers are really good at assimilation and prediction tasks. Quantum Monte Carlo Methods for estimating a parameter to a certain level of precision with quadratically fewer samples quantum mechanically, these are really solid”.
Major market players like J.P. Morgan have invested significant amounts in the hope that quantum computers will yield benefits over standard models [6]. Other firms should take note. It does not bode well to fall behind.
Enhanced Security
The cost of fraud in the UK is growing. Between the period 2017-2018, an estimated £2billion [7] was stolen from British credit and debit cards. This problem will only be exacerbated as quantum technology invalidates traditional security protocols. Quantum computers are very good at factoring large numbers (something which humans struggle to do) and can effectively unzip encryption methods which previously would have taken years to decipher.
In crisis comes opportunity. Quantum tech will enable banks to address these challenges with a consistency and level of protection that was previously impossible, thanks to new quantum encryption methods and technology.
Speaking at BlockFin in 2018, Mark Jackson of Cambridge Quantum Computing, said “There is a way of adding encryption that is quantum proof: Quantum Key Distribution (QKD). With normal computing if someone is eaves dropping, you don’t know this until it’s too late. With QKD, you actually know it immediately. It’s guaranteed by the laws of physics to be secure” [8].
Quantum protocols like QKD, will guarantee new heights of security; protecting customers’ accounts, and if combined with technologies like blockchain, will create robust accountability. It is in the interest of the financial industry to imagine the post-quantum cyber security world and take steps to get ahead of the coming change.
Quantum Time Keeping
Accurate and traceable time stamping is vital to the financial sector (in both practical and legal terms) when determining exactly who made what trade, and precisely when [9]. Atomic clocks have typically been used as the means for standard time keeping. Now a new generation of quantum clocks will provide improvements in time keeping magnitudes more accurate than that of their predecessors. Financial markets will directly benefit from such an advancement and quantum technologies will become indispensable to key market players hoping to build competitive advantage through high-speed trading.
An Opportunity
The implications of these technologies are likely to be far reaching across the sector. Though significant barriers to entry do exist, chiefly the task of identifying and developing the talent needed to stay ahead of developments, the cost of hesitation will be greater than the benefits reaped from acting promptly.
QURECA – Supporting individuals and businesses to be part of the quantum revolution.
[1] IMB, Exploring quantum computing use cases for financial services, no date – https://www.ibm.com/thought-leadership/institute-business-value/report/exploring-quantum-financial
[2] National Physical Laboratory (NPL), A complete guide to time stamping regulations in the financial sector, no date – https://www.npl.co.uk/getattachment/5b94a9f8-bd79-478e-ba25-8fc56f51be33/NPLTime_Complete_Guide.pdf.aspx?lang=en-GB&ext=.pdf
[3] P. Barkoutsos, et al, Improving Variational Quantum Optimization using CVaR, 2020 – https://arxiv.org/abs/1907.04769
[4] Inside Quantum Technology, Quantum Computing Disrupts Finance, 2020 – https://www.insidequantumtechnology.com/quantum-computing-disrupts-finance/
[5] – Dr Jayne Thompson (Horizon Quantum Computing) with SGInnovate and the High Commission of Canada, 2020 – https://www.youtube.com/watch?v=1CB7D-Z3o5M
[6] A. Schreiber, Quantum Computing & FinTech Applications, 2020 – https://towardsdatascience.com/quantum-computing-fintech-applications-6bed5415306a
[7] Finextra, The climbing cost of fraud, 2018 – https://www.finextra.com/pressarticle/75038/the-climbing-cost-of-fraud-over-2-billion-stolen-from-uk-credit-and-debit-cards-in-the-last-year
[8] Mark Jackson, The Quantum Computing Revolution in FinTech, 2018 – https://www.youtube.com/watch?v=vAu0CAktqgQ
[9] National Physical Laboratory (NPL), A complete guide to time stamping regulations in the financial sector, no date – https://www.npl.co.uk/getattachment/5b94a9f8-bd79-478e-ba25-8fc56f51be33/NPLTime_Complete_Guide.pdf.aspx?lang=en-GB&ext=.pdf