Quantum Breakthroughs in Finance
- HSBC announced yesterday that it had been able to provide new evidence of the possibility of using quantum computing in algorithmic bond trading. The bank said it had “achieved a breakthrough in deploying quantum computing in financial markets”. Working alongside the global tech company IBM, HSBC was able to produce a 34 % improvement in predicting how likely a trade would be filled at a quoted price compared to the standard techniques used in the industry today. The dataset covered more than a million requests for quotes across 5,000 bonds between September 2023 and October 2024.
What is quantum computing?
- Quantum computing is a new field of computation that utilises the laws of quantum mechanics to represent and process information in a space that is exponentially more extensive and powerful than what classical systems can currently access. In finance, it could transform how pricing, risk modelling, and portfolio optimisation are performed.
What is algorithmic trading?
- Algorithmic trading utilises a computer program that follows a predefined set of instructions, known as an algorithm, to execute a trade. Why are financial firms looking at this? This type of trading, in theory, can generate profits at a speed and frequency that is impossible for a human trader to achieve. The obstacles of algorithmic trading lie in the complex factors the code must consider, such as mathematical models and historical data, which also means that it does not take into account the subjective and qualitative factors that can influence market movements.
Benefits and drawbacks of algorithmic trading
- The significant benefits are that algorithms can be backtested using available historical and real time data to determine if they are a viable trading strategy, reducing human error and facilitating prompt executions, which in turn reduces the effect of price fluctuations.
- The major drawback is that the lack of human input means unforeseen market disruptions, known as ‘black swan events’, can occur, resulting in losses for algorithmic traders. The development and implementation of algorithmic trading systems are expensive, and quantum computing has been described by physicists as still being mainly in the research phase, leaving plenty of time before it is deployed for commercial use. Robert Lea, a senior Bloomberg analyst, draws a parallel between nuclear fusion and quantum computers, stating, “These are two technologies with massive long term promise, but they face considerable technological barriers and we’re nowhere near achieving commercial deployment alive for them.”
Bottom line
- At Cordoba, we are always at the cutting edge of financial innovation, bringing you the latest developments in strategy. As a physics student myself, our take here at Cordoba Capital is that although quantum computing and algorithmic trading are fascinating to hear about and learn, what HSBC has produced undoubtedly shows the potential of these two technologies.
- We must take a step back and realise that we are still very far from seeing the technology being used in the finance sector anytime soon. Taking the most optimistic opinions, analysts predict applications of quantum computing could be seen in 10 – 15 years, which is still some time away.
- That being said, Quantum computing is a market worth following, with a projected market size that is expected to grow from $1,160.1 million in 2024 to $12,620.7 million by 2032, exhibiting a compound annual growth rate (CAGR) of 34.8% during the forecast period.
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