Can Quantum Computing Transform the Financial Services Industry

Published on 17 Oct, 2019

Quantum computing, a popular concept, is set to transform the financial services industry. The technology has been in existence since 1981 but is still at the nascent stage. Considering its powerful real-world applications, the potential ramifications far exceed the possibilities associated with current technology. This article highlights the likely use cases of quantum computing in financial services that could contribute to the growth of the industry.

Quantum computers work on the principle of quantum mechanics in processing complex computations, using quantum bits or qubits which have the ability to store 0 or 1 or both at the same time. They operate 100,000 times faster and store far more data than traditional computers.

Over the last few years, the financial services domain has increasingly been driven by new technologies such as fintech, artificial intelligence (AI), data analytics, blockchain and process automations. The next wave likely to take over the industry is quantum computing, which is expected to address various complex issues facing the sector. For example, it could simplify the process for a bank wanting to ascertain the minimum cash balance across its ATMs at different locations, with variations in the level of withdrawal for each machine.

Financial institutions, portfolio managers and hedge funds are interested in adopting this technology as it could make analysis more sophisticated. Hedge funds such as DE Shaw, Renaissance Technologies, WorldQuant, and Two Sigma are already experimenting with quantum computing for use in quantitative investments, as it helps in calculating a series of potential outcomes compared to traditional computers.

Some of the segments in financial services that can benefit from quantum computing are:

  • Portfolio Analysis: Quantum computing helps in grouping disparate data sets related to various assets for investments by determining how these can be interconnected and dependent. This eliminates the need to correlate assets, thereby lowering the portfolio risk compared to traditional methods. Overall, it assists the user in identifying the most attractive portfolio based on set parameters. Banks and institutions such as Barclays and JP Morgan Chase use quantum computing (Monte Carlo simulations) to speed up portfolio optimization.
  • Fraud Detection: The threat of security breaches and frauds associated with banking services such as online transfers and payments can be overcome by using quantum mechanics. Automated fraud detection relies on pattern recognition and quantum computing can support effective pattern recognition algorithms that can cohesively operate with complicated statistical problems. As a result, frauds can be identified automatically through self-learning networks which also enables organizations to detect any criminal network activity.
  • Optimization: Quantum technology can support billions of transactions per second, a positive for institutions constantly overloaded with high transaction volumes. Additionally, infrastructure downtime would be close to zero with quantum technology increasing efficiency—large transaction batches can be cleared without the risk of systems crashing.
  • High Frequency Trading (HFT): It is very important for financial firms to execute trades quickly. This can be achieved by quantum computing applications in complex quantitative buy-sell strategies. Financial firms can generate higher returns at low risk. HFT involves a set of intricate algorithms that make automated buy and sell decisions after taking into account the investor’s investment horizon. Traders can make faster decisions in fractions of milliseconds and gain an edge over their traditional counterparts.
  • Analytics-driven Customer Relationship Management (CRM): Quantum technology is expected to improve CRM in banking and insurance. It will increase accuracy in targeting the right customer, based on purchasing trends and preferences as per the demographics.
  • Quantum Cryptography: New-age hackers are capable of taking control of remote devices and accessing confidential data. Financial data encrypted with quantum cryptography is considered more secure than any other type of digital security. Hackers cannot read the data encrypted in quantum form because they shapeshift by changing states, preventing eavesdropping.
  • Quantum Data: Almost all available information can be analyzed instantaneously using quantum computers. Additionally, AI and pre-programmed rules facilitate automated decision making, expediting efficiency.

These advantages have prompted companies such as Barclays and JPMorgan Chase to join IBM’s Q Network, a collaboration of Fortune 500 companies, national research labs and academic institutions working directly with IBM for the advancement of quantum computing. These banks have employed mathematicians, computer programmers, and physicists to achieve a milestone – quantum advantage – the moment when a quantum computer can run a task better than a traditional computer.

As part of the network, JP Morgan Chase would explore how it can use quantum computing for trading, risk analysis and portfolio optimization. The company’s technologists will work with IBM’s researchers and leverage quantum systems to learn future applications of this technology.

There are some challenges, such as speed of connectivity, coherence, maintaining a cryogenic temperature and building the related infrastructure, due to which the technology is yet to achieve its full potential.

In our opinion, an ecosystem of quantum users, quantum computer developers, and training institutes will be critical in creating a vibrant future for the quantum computing industry. Ongoing experiments in quantum hardware have set expectations high. Therefore, we believe quantum computers will play a key role in quantitative finance.