The rapid advancements in quantum computing commercialization over the past decade have greatly influenced the future of financial systems. With their ability to solve complex calculations faster and more efficiently than classical computers, quantum computers hold immense potential to reshape the financial industry.
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The unique capabilities offered by QC have garnered a lot of interest in various applications and industries. Exponentially faster processing times for various tasks position quantum computing as a superior tool. For example, classical clustered supercomputers are limited when computing molecular interactions1. While two-body interactions can be adequately calculated, once the number of interacting molecules with various properties increases, classical computers take prohibitively longer to compute desired results. A quantum computer on the other hand has been theorized to carry out computations involving many interdependent variables much faster and much more efficiently. This capability, which is very useful in drug discovery and formulations of pharmaceuticals, has also become highly sought after for financial systems.
Advantages of Quantum Computing for the Financial Sector
Complex calculations for analysis, forecasting, and optimization are hallmarks of the financial system2,3. The sheer amplitude of these problems makes their computational complexity overwhelming, even for today's high-performance machines. Some of these issues may be resolved by quantum computing, which has the capacity to handle enormous amounts of solution states and carry out intricate computations quickly.
The processing power exhibited by quantum computers and their rapid development have attracted the attention of all important stakeholders in the financial sector from investors, financial market operators to researchers and policymakers. Some of the key financial processes that stand to gain from quantum computing include:
Portfolio Management
A formal mathematical method for choosing investments across a group of assets or financial instruments is called portfolio optimization2,3. It entails concurrently maximizing profit and minimizing risk. The intricacy of these optimization issues may lead to extremely sophisticated computations.
For example, option pricing determines the fair value of options by taking into account a number of variables, such as interest rates, time to expiration, volatility, and the price of the underlying asset. Conventional approaches offer estimations, but they might not fully account for all market intricacies. Investment firms may be able to optimize their portfolios more effectively thanks to the increased processing speed of quantum computers.
Payment Systems
Another area where quantum computing can have a big impact is in payment systems. Using new technologies to settle payments could lead to increased liquidity3.
A real-world example of these advantages was evidenced in an experiment, which executed payment transactions on a 30-day sample from a Canadian payment system. The study evaluated possible enhancements in daily liquidity using a quantum-enhanced annealing model. Substantial liquidity savings were projected in the range of CAD 239.93 million to CAD 275.70 million, which clearly illustrates the observable advantages that the payments industry can experience from quantum technologies.
Currency Arbitrage High-Frequency Trading (HFT)
HFT is a popular algorithmic trading technique that seeks to avoid losing deals or making the wrong trades while identifying as many successful currency combinations as possible4.
Traditional computers limit HFT in two key areas, the fleeting nature of profitable arbitrage opportunities, often lasting only milliseconds, and the difficulty of consistently increasing trading success rates. Quantum computing promises to significantly improve trading speed and profitability by accurately identifying and exploiting sub-millisecond arbitrage opportunities, overcoming a major industry bottleneck.
Risk Management
The process of recognizing, evaluating, and controlling financial risks in order to lower the possibility of loss is known as financial risk management2,3. Quantum algorithms are anticipated to provide a substantial advantage over traditional methods in specific financial applications, such as systemic risk assessment and risk simulations. This includes enhancing the accuracy of Monte Carlo simulations for predictive modeling. Such advancements could significantly improve how financial risks are analyzed and managed.
Security Risks of a Quantum Financial System
While quantum computing offers transformative potential for finance, it also poses a major security risk - its ability to break widely used encryption. This could compromise the authentication and encryption underpinning digital communications and financial systems, leading to significant financial and reputational damage.
Cryptography relies on mathematically complex algorithms, making decryption without a known key computationally infeasible for classical computers. However, quantum computing threatens this security by rapidly solving these problems, potentially rendering widely used encryption methods like Elliptic Curve Cryptography (ECC) and Rivest-Shamir-Adleman (RSA) obsolete.
The security of financial systems is significantly impacted by the capacity of quantum computers to breach modern cryptographic algorithms. Online and mobile banking, financial transactions (including cash withdrawals), business-to-business privacy, and virtual private network (VPN) communications are a few areas that are susceptible.
Overcoming Risks Associated with Quantum Financial Systems
To counter the threat of quantum computers breaking current encryption, researchers are developing "post-quantum cryptography" (PQC) algorithms3. Intriguingly, classical computers can implement these PQC algorithms, creating encryptions that even quantum computers are unable to break. The key is basing these new algorithms on mathematical problems that quantum computers cannot efficiently solve.
Quantum cryptography leverages quantum mechanics principles like superposition and entanglement to create secure communication channels5. A key element, quantum key distribution, enables the establishment of shared secret keys while guaranteeing the detection of any eavesdropping attempts. However, there are still certain challenges with scalability and integration into current infrastructures when it comes to the practical application of this promising technology.
With the emergence of quantum computing as a pivotal technology in the financial sector, banking authorities and other relevant stakeholders have a responsibility to maintain financial stability and prevent all the associated risks. Various technological implementations and legislative regulations are currently being discussed. For example, Project Leap, a joint effort between the Deutsche Bundesbank, Bank of France, and the BIS Innovation Hub Eurosystem Centre, aims to strengthen the financial system's defenses against possible cyber threats from quantum computing3. The project aims to proactively address emerging cyber threats, recognizing the critical role central banks play in maintaining financial stability.
Conclusion
Quantum computing is a powerful technology which will undoubtedly dramatically accelerate various financial tasks. Its strengths align closely with the computational demands of the financial industry, making it particularly well-suited for complex calculations. Key areas within finance—such as portfolio management, payment systems, risk management, currency arbitrage, and high-frequency trading—stand to gain significant advantages from this developing technology.
While the benefits of implementing quantum computing in the finance sector are immense, this revolution will also pose certain security risks. Stakeholders in both the financial sector and quantum technology research are actively developing innovative strategies to mitigate potential threats and ensure a secure quantum financial system.
References and Further Reading
- Bova, F., Goldfarb, A. & Melko, R.G. Commercial applications of quantum computing. EPJ Quantum Technology. 8, 2 (2021). https://doi.org/10.1140/epjqt/s40507-021-00091-1
- D. J. Egger et al., "Quantum Computing for Finance: State-of-the-Art and Future Prospects," in IEEE Transactions on Quantum Engineering, vol. 1, pp. 1-24, 2020, Art no. 3101724, doi: 10.1109/TQE.2020.3030314
- Auer, Raphael A., Angela Dupont, Leonardo Gambacorta, Joon Suk Park, Koji Takahashi, and Andras Valko. Quantum computing and the financial system: opportunities and risks. BIS, Bank for International Settlements, 2024.
- The Quantum Economy Network. "Quantum-inspired High-Frequency Trading system." World Economic Forum. Available online at: https://initiatives.weforum.org/quantum/case-study-details/quantum-inspired-high-frequency-trading-system/aJYTG0000000H7J4AU
- Portmann, Christopher, and Renato Renner. "Security in quantum cryptography." Reviews of Modern Physics 94, no. 2 (2022): 025008.
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