The Difference Quatum Technology Brings to Finance

Although artificial intelligence is the brightest star in today's technological sky, there is another topic with even greater potential to transform the world we live in, and which has aroused the interest of individuals, organizations and companies: quantum technology.

In practice, we usually refer to scientific study when we talk about quantum issues. However, this technology is already being used in the financial and banking sector.

Although large-scale commercial adoption of quantum computing, which promises to dramatically improve processing speed, is still years away, some financial services firms such as McKinsey & Company are talking about the upcoming adoption of quantum-inspired technologies for intermediate benefits.

How Does It Work?

Information is stored in traditional computers in the form of zeros or ones. Quantum computers employ quantum bits, or qubits, which are a complicated combination of zeros and ones that represent and store information in a quantum state. Machines that can support this quantum state have the ability to sort through a large number of alternatives in near real time, allowing them to address questions that today's most powerful computers cannot.

Quantum-inspired technology is a broad term that refers to the use of certain algorithms that run on quantum computers rather than on traditional fast processors. These algorithms are well suited to tackle optimization problems, which are widespread in the financial services industry and include risk analysis and derivatives pricing.

A Classic Problem In Finance

When constructing an investment portfolio, it is important to choose an asset mix that optimizes return and minimizes risk. This requires taking into account a number of factors that can influence the performance of these assets and that change over time. Configuring portfolios dynamically, i.e. frequently changing the weight of the various assets in the portfolio over time, is one way to address this issue. Defining the best trajectory for these securities by taking into account all the elements that influence their volatility, such as transaction fees, is a well-known issue in finance that has so far proved impossible to solve with standard methods.

The researchers used multiple quantum technology platforms, inspired by quantum computing and traditional methodologies, to address this problem in proof-of-concept, and compared the results. Their findings show that tools based on quantum computing, as well as algorithms inspired by quantum computing, could already outperform traditional approaches in this task. Furthermore, the authors believe that this is the first time quantum technology techniques have been used to improve a large-scale investment portfolio with commercial value.

Application In The Financial Industry

Analysts say that as CEOs become more aware of quantum computing in the real world, interest in quantum-inspired technologies is increasing. Quantum-inspired technology is attracting attention from companies such as HSBC Holdings PLC, Ally Financial Inc. and Spanish multinational bank BBVA.

According to Troels Steenstrup, CTO of KPMG's Global Quantum Hub, quantum-inspired optimization problems can offer solutions that are 1% to 10% more accurate than conventional techniques and two to three times faster.

Part of these advancements will be investigated in Spain, owing to a collaboration between BBVA and the Spanish National Research Council (CSIC) to investigate quantum technology's potential. According to Escolástico Sánchez, head of BBVA's Research and Development in New Digital Businesses discipline, the use of these algorithms would allow new variables, such as sustainability, to be added to calculations, allowing for the creation of products that are better suited to customers' needs and have a positive impact on the future, while also reducing the time it takes to create them from days to hours. "It might help customers make better investing decisions while also advancing sustainable goals," Sánchez added.

Another area where quantum computing might help is in risk and financial analysis. Calculating externalities and comprehending how various forms of risk interact is exceedingly difficult. The majority of the financial industry, on the other hand, feels that quantum computing can assist them solve difficulties in their investment portfolios. "Rather than looking back in time to assess what happened, a quantum computer would respond fast to changing economic circumstances and make judgments nearly immediately," explains Stefan Woerner, one of the public heads of an IBM research on banking and quantum computing.

Quantum technologies have the potential to change computers and, with it, a host of other industries and societal issues, but they are still a long way off. Physics-inspired computing, such as that created by Quside, sits halfway between them and traditional computers, making the most of today's processing power and saving time and money.