Quantum computing, which uses principles of quantum mechanics to solve complex problems, is being explored by financial institutions for its potential to transform computations. President Biden signed the Quantum Computing Cybersecurity Preparedness Act in 2022, acknowledging the potential threat of quantum decryption. Major financial institutions are investing in quantum computing, with up to $850 billion expected over the next 30 years. Public sector investment in quantum computing has also increased, with the U.S., European Union and Canada investing over $3.1 billion. The Financial Industry Regulatory Authority (FINRA) has initiated research into the opportunities and risks of quantum computing.
Quantum Computing and Its Potential Impact on the Financial Sector
Quantum computing, a branch of physics that utilises the principles of quantum mechanics, is being explored by numerous financial institutions due to its potential to solve problems too large or complex for traditional computers. Despite being in its early stages, the technology has the potential to significantly alter the types and speed of computations that are possible. In December 2022, the Quantum Computing Cybersecurity Preparedness Act was signed into law in the U.S., acknowledging the potential threat of quantum decryption and encouraging regulators to adopt technologies to protect against quantum computing attacks.
In recent years, quantum computing has been identified by several major financial institutions as a technology with the potential to significantly disrupt the securities industry. While only a small percentage of companies budgeted for quantum-related expenses in 2018, it is estimated that as much as 20 percent may do so by 2023, with up to $850 billion in investments anticipated over the next 30 years. Equity investment in quantum computing has also seen a significant increase in recent years, with record levels of funding in the quantum computing space.
Public Sector Investment in Quantum Computing
The public sector has also shown a commitment to investing in quantum computing. In the previous year, the U.S., European Union, and Canada collectively invested over $3.1 billion. There were also notable technical breakthroughs in the area, as demonstrated by the Nobel Prize in Physics in 2022 being awarded to quantum computing research groups. These investments and accomplishments can be seen as a sign of increasing confidence in the potential for quantum computing.
Quantum Computing’s Potential to Reshape the Financial Services Industry
Despite having an uncertain timetable for its development, quantum computing has the potential to reshape the financial services industry by presenting newfound capabilities and challenges for firms. The extent of technical achievement in the field of quantum computing has been debated, but global investment and interest in the potential of quantum computing continues to steadily grow.
In light of the potentially transformative impact that quantum computing may have on the securities industry, a research initiative was launched by the Office of Financial Innovation (OFI) to focus on the opportunities and risks quantum computing presents. This research involved engaging with more than 20 stakeholders, including financial institutions, quantum computing hardware and software providers, academics, industry observers, government entities, security specialists, and trade institutions.
Main Findings of the Quantum Computing Research
The research initiative culminated in a report that summarises the main findings. The report provides a brief overview of quantum computing, identifies and analyses the potential applications for quantum computing that the securities industry is exploring, addresses the potential threats to cybersecurity that quantum computing may pose, and outlines some potential regulatory considerations associated with quantum computing. The report is intended to raise awareness among member firms and the broader securities industry by providing an overview of how developments in quantum computing may impact business models and processes.
While reportedly only one percent of companies budgeted for quantum-related expenses during 2018, by some estimates as much as 20 percent may do so in some form by 2023, with up to $850 billion in investments anticipated over the next 30 years.
Quantum Computing in the Securities Industry
Quantum computing is being explored by several firms in the securities industry for potential benefits in trade execution, portfolio management, risk assessments and fraud detection. Some firms are also assessing the potential risk quantum computers may pose to current encryption standards for securing critical data. However, the timeline for any practical changes resulting from quantum computing is a topic of ongoing debate.
Financial institutions are exploring how leveraging quantum for exponential improvements in computing performance could enhance business operations. The financial services industry has identified three potential areas involving computational challenges where quantum computing may have a significant impact: optimization systems, simulation systems and artificial intelligence.
Optimization Systems and Quantum Computing
Quantum computers’ ability to efficiently analyze and process numerous potential outcomes in real time may benefit optimization systems firms use. These computationally intense quantum models may process large sets of variables and allow for faster and more accurate optimizations. This includes determining valuations that can deliver competitive advantages, calculating more precise estimates of credit exposure, and better allocating capital across a range of corporate financial activities.
Financial institutions are focusing on areas such as enhancements for trade execution, trade settlement and portfolio management. Quantum-based algorithms may be used to efficiently determine the optimal solution among various options due to the ability to survey multiple possible solutions simultaneously. This could potentially streamline trade execution and settlement processes as well as enable investment managers to improve portfolio management.
Quantum Computing and Trade Optimization
Financial institutions are frequently tasked with determining how best to execute trades. This involves weighing a variety of factors, such as trade sizes, venues, timing and sequencing. These factors can impact the quality of trade execution and it is computationally challenging for even the most advanced classical computers to consider all the possible permutations given the number of potential variables. Some firms are assessing how quantum computing could offer a potential breakthrough for these trade execution challenges due to its ability to survey multiple possible solutions simultaneously.
Quantum Computing in Trade Settlement Optimization
The trade settlement process involves securities being delivered by a seller against payment made by a purchaser, frequently facilitated by a clearinghouse, which can help to mitigate counterparty risk. Clearinghouses run trade settlement optimization analyses, which they use to determine the optimal routing trajectory for settling thousands of trades and matching up buyers and sellers at millisecond speeds, while also accounting for other legal, business, and operational factors. Quantum computing may help optimize the trade settlement process by using quantum-based optimization algorithms to discover links for multi-party settlements, thereby making the process faster and more efficient.
Quantum Computing in Investment Portfolio Optimization
Portfolio optimization involves determining the optimal mix of investment assets to achieve a desired objective, such as maximizing return and minimizing risk, over a given period of time. Firms are researching whether quantum computing has the potential to improve the portfolio optimization process by offering the computational capacity to assess various scenarios involving a multitude of assets and related factors. Quantum computers may potentially offer an enhanced ability to allocate weights to assets over a period of time, forecast asset returns, assess volatility and measure risk.
Quantum Computing in Simulation Systems
Quantum-based simulations could enhance firms’ abilities to understand and account for uncertainty related to market activity. Firms are examining ways to use quantum computers to run simulations of market-related activity that would otherwise be difficult or potentially impossible to capture with classical computers. In particular, financial institutions are exploring the use of quantum computers to assist with analyzing market activity related to risk assessments.
Quantum Computing in Artificial Intelligence
The financial services industry has allocated considerable resources to researching, developing and adopting artificial intelligence (AI) tools, including by leveraging computing power to analyze large data sets. Though quantum computing is still in a developmental phase, some market participants view it as a potential accelerant for AI because of its potential to enhance the ability to process and analyze large data sets. However, as quantum computing may accelerate the potential beneficial impact of AI, it may similarly accelerate related risks.
“Quantum computing has a hype problem.”
Researchers from the Massachusetts Institute of Technology (MIT)
“One report by a technology firm notes that “[t]o help put this type of optimization problem in perspective, consider that selecting the optimal order of execution for 5,000 trades has more than 4.2 x 1016,325 possibilities.””
Summary
Quantum computing, a technology still in its early stages, is being explored by financial institutions and regulators for its potential to significantly alter computations in the securities industry. Despite an uncertain development timeline, global investment in quantum computing is growing, with its potential to reshape the financial services industry by presenting new capabilities and challenges.
- Quantum computing, a technology based on quantum mechanics, is being explored by financial institutions due to its potential to significantly change computations in terms of type and speed.
- In December 2022, President Biden signed the Quantum Computing Cybersecurity Preparedness Act into law, acknowledging the potential threat of quantum decryption and encouraging the adoption of protective technologies.
- Major financial institutions have identified quantum computing as a potentially disruptive technology for the securities industry. Investment in quantum computing is expected to increase, with up to $850 billion anticipated over the next 30 years.
- Public sector investment in quantum computing has also been significant, with the U.S., European Union, and Canada investing over $3.1 billion collectively last year.
- Despite debates over the extent of technical achievement in quantum computing, global interest and investment in the field continue to grow.
- The Financial Industry Regulatory Authority (FINRA) has initiated a research initiative focusing on the opportunities and risks presented by quantum computing. This includes engaging with stakeholders such as financial institutions, quantum computing hardware and software providers, academics, and government entities.
- The report produced by FINRA aims to raise awareness among member firms and the broader securities industry about the potential impact of quantum computing on business models and processes.