What could quantum computing mean for the City of London?

Researchers have been discussing the possibility that quantum computing could make traditional computing speeds obsolete since the 1970’s. Nearly half a century later, the money - and technology - seem to be flowing in to finally make the idea a reality.

The number of venture capital deals backing quantum computing start-ups rose 46 per cent in 2020 compared to 2019, for a total of $365 million, according to research from CB Insights. Hermann Hauser, the veteran technology investor, and founder of Arm predecessor Acorn Computers, estimates there are currently 193 quantum computing start-ups around the world.

Practical applications also seem to be appearing in financial services. Earlier this year, Goldman Sachs and QC Ware researchers claimed to have created quantum algorithms that outperform the most advanced classical algorithms for “Monte Carlo” simulations. These Monte Carlo algorithms are a type of randomised algorithm - which uses randomness as part of its reasoning process - whose output may be incorrect. These types of algorithms are commonly used by traders at investment banks seeking an edge over the competition, to evaluate risk and simulate prices for a variety of different financial instruments.

The UK government is also betting on the future of quantum computing. In March this year, it announced it is set to invest £153 million in quantum technologies, saying quantum computing is expected to have a significant impact on quantitative finance and data security in the financial services industry. The Financial Conduct Authority (FCA) has also highlighted the ability of quantum computing to disrupt the industry and emphasised the benefits of tackling potential challenges early on.

“Every technological development from the first computers to the Internet and AI have raised challenges and opportunities for businesses and regulators,” said a write-up of a recent workshop on the topic ran by the FCA. “Experience also shows that the sooner the challenges are addressed the more effectively the opportunities can be maximised, and the challenges tackled.

With so much capital behind quantum research and such lofty claims regarding its ability to shape the future of technology, it is a logical step for the financial services world to stay aware of quantum computing’s ability to disrupt the industry.

However, Scott Joel Aaronson, professor of computer science at the University of Texas at Austin, believes it’s important to be prudent regarding the claims of quantum start-ups - regardless of the academic credentials of those involved.

“And in many cases, to have a shot at such riches, all an expert needs to do is profess optimism that quantum computing will have revolutionary, world-changing applications and have them soon,” said Aaronson.

FStech spoke to several UK quantum computing companies and looked at the relevant research to determine the short to medium term impact of quantum computing on UK financial services.

How quantum computing could help UK financial services institutions

Quantum computing will likely have the biggest impact on areas of financial services where large amounts of processing power are required, where quantum computing’s advantage would be most meaningful.

“Areas set to benefit the most are incredibly varied, from customer service to capital markets, from portfolio optimisation to securities pricing,” said Zurab Ashvil chief executive and founder of tech scale up L3COS. “But, as quantum computing is most powerful when there is changeability or uncertainty, real-time equity prices is a particularly promising area.”

Assessing risk when lending money by evaluating the history, age, and other assets of the borrower is an extremely important activity for many financial services institutions. However, sometimes a lot of this requisite data is not highly correlated to credit worthiness, and this often makes processing risk computationally intensive and impractical.

Dr Martin Lukavec, senior lecturer in finance at London School of Business & Finance (LSBF) believes that the credit scoring benefits of quantum computing could one day make a positive impact on financial services and the wider economy.

“Currently, for example, it doesn’t make much sense to run a Monte Carlo simulation with a high number of variables and constraints for every creditworthiness assessment,” said Ludavec. “This might change with quantum computing.”

“The result will be smaller risk premiums and fairer lending to worthy creditors.”

He added: “Although the impact on the economy will be small, it will be continuous, adding a tiny bit of productivity every year.”

Some commentators believe it is important to keep in mind that the actual use cases of quantum computing in financial services might remain unclear until the technology itself becomes further advanced.

“There is still a need to gain a clearer view of the potential applications of quantum technology in financial services and to assess which ones will be more disruptive,” said the FCA webinar write-up. “There is a consensus that wholesale use cases – for example portfolio optimisation - are currently showing the most traction, however, there is a need to see and understand these deployments in detail.”

And though quantum computing would potentially enable certain financial models to be processed much faster, it would not necessarily make these models correct. This means that if for example many financial services institutions made investment decisions based on a flawed model, this could still be hugely dangerous from a risk perspective.

“Even widely accepted models may make erroneous predictions in qualitatively new situations,” said a research paper from Cornell University called “Quantum computing for finance”. The paper pointed to the 2008 financial crises as an example. Claiming that it was “caused to a large extent by extrapolating the past low-risk performance of mortgage-based assets to the qualitatively different situation created by the proliferation of subprime mortgages.”

Essentially, risk may have been “accurately” calculated based on the past performance of mortgage assets, but calculations did not consider that mortgages were being given out more loosely than in the past and therefore represented a much riskier investment.

“While quantum computing provides powerful computational tools, whether or not it can predict this type of event remains to be proven,” said the paper.

Risks for financial services institutions

Though financial services institutions could one day soon have access to quantum computers, they would not be the only ones. The superior processing power of quantum machines could be used either by cybercriminals or foreign powers to launch cyberattacks. Financial services institutions would certainly represent an attractive target for these bad actors due to the large amount of the data they hold about consumers and businesses.

“A quantum computer's exponentially higher processing power will allow it to break the most common form of encryption - public-key cryptography - used by virtually every financial institution under the sun,” said Dr Ali El Kaafarani, research fellow at Oxford’s Mathematical Institute and chief executive of cyber defence start-up PQShield “For banks, as the stewards of critically-sensitive financial information, this compromises their ability to demonstrate to regulators that they meet the highest security standards and can secure their customers’ data indefinitely and safely.”

“The scale of cryptographic infrastructure within banks means that they are particularly vulnerable to the quantum threat. Cryptography in banking currently secures everything from transactions and data transfers to bank cards, ATM machines, online payments and mobile apps.”

He added: “Every one of these interconnected layers - across hardware, software and services - is a potential Achilles heel if it isn’t future-proofed with quantum-secure algorithms.”

Gamechanger for the city or a mere hype job?

Opinions differ however regarding exactly how impactful quantum computing will be on the financial services industry.

“We need to recalibrate our collective expectations,” said Sally Epstein, head of strategic technology at Cambridge Consultant, a subsidiary of Capgemini. “It’s wrong to assume that the digital technologies that are so ubiquitous in financial services will prevail indefinitely.”
She added: “Quantum computing has the potential to disrupt every market at a scale not seen since the advent of the personal computer.”

However, Epstein believes that gaining a competitive advantage from quantum will hinge on organisations being able to identify the use cases where it has the most impact. This means organisations will need “to identify the right applications, as the potential architecture of a general-purpose quantum computer is in flux, which has a huge knock-on effect to which approaches are most amenable to the acceleration provided,” according to Epstein.

Some experts hold more muted opinions on the subject, including Lukavec from LSBF.

“Will quantum computing make financial markets more efficient?” said Lukavec. “Yes, but not evenly and probably not to the point where people on the outside of the industry will notice.”

“In asset management, portfolio optimisation and risk management, quantum computing is likely to reach better results. This means, enough to give their users an edge against their competitors, which is also a likely reason why it will be implemented.”

He added: “However, this efficiency increase will probably be so small that it will be very unlikely that we even notice it in GDP growth numbers - yet, we might be able to by using quantum analytical tools.”

Cost concerns could be crucial in determining which players get to access the benefits of quantum computing, and how its impact on the industry is set to be dispersed.

“Quantum computers are going to be expensive for a while and, as such, their owners are likely to be only big investors,” said Lukavec from LSBF. “This could put the small players at a clear disadvantage and the industry could become more concentrated.”

However, Steven Herbert, senior research scientist from independent quantum computing company Cambridge Quantum, does not think the first mover advantage will ultimately be that significant of a factor when determining who ultimately gets the benefits from quantum computing.

“I think it's important to recognize that it's certainly not just these huge names who are working on quantum and developing very active public content programs,” he said. “Within the UK, RBS, HSBC, and Barclays all have very active programs.”

He added: “I think that it is not the case that only powerful and very powerful institutions are looking at quantum technologies.”

Could the UK be left behind in the quantum finance race?

With the gargantuan number of resources which US-based BigTechs and China are investing into quantum computing, you could question whether the UK is able to compete in the quantum race. The Chinese government is investing $10 billion into building a quantum computing research facility in Hefei, while the US government is reportedly providing upwards of $200 million per year for quantum computing research.

But many experts believe that the UK is well placed to benefit from quantum computing.

“The UK already has a rich ecosystem for quantum computing and a comprehensive 10-year quantum strategy in place, with the National Quantum Computing Center acting as the epicentre of activity,” said Epstein from Cambridge Consultant.

“I think a really important point to make is that the UK realised the importance of quantum computing very early, which is a great thing for industry and academia,” said Herbert of Cambridge Quantum. “I think that needs to continue, of course - we have to retain that position.”

He added: “It's certainly not just Cambridge, you see very good ideas and companies and spin outs and start-ups in any number of UK cities spread geographically across the UK.”

Ashvil from L3COS believes that the UK government needs to take the right approach if it is to reap the potential benefits of quantum computing.

“The government loves to talk about the UK’s political and legal sovereignty but is reluctant to embrace the digital and technological sovereignty quantum can offer,” he said. “From what we have seen so far, they are too reliant on outsourced consultants to fully embrace the potential of new tech.”

“But they must. The decisions they make right now will decide whether the UK is a passive user or an active innovator. If the UK adopts a Silicon Valley mindset, it could take the advantage and soon lead the way.”

“The recent partnership with IBM on quantum computing research initiatives was a step in the right direction and we are encouraged by what we have seen.”
He added: “The government needs to make the right choices, such as continuing research partnerships and invest in new ventures, to ensure the UK doesn’t miss the boat and end up merely following the crowd.”

Is there any certainty on the horizon about quantum finance?

There seems to be a consensus among commentators that quantum computing will have a limited im-pact on the world of UK finance in the not-too-distant future. However, the jury is still out on how great the disruption will ultimately be. Ludavec from LSBF admitted that his predictions are “somewhat qualified guesses and a lot of uncertainty remains.”

It’s also important to understand that quantum financial technology will likely represent an entirely new era altogether, rather than just offering a faster and more powerful version of old technology. At least according to “Prospects and challenges of quantum finance” a paper drafted by researchers at quantum computing start-up QC Ware.

“Quantum computers are not merely faster processors that one can blindly use instead of classical computers to speed up all problems,” the paper said. “They are a fundamentally different way of performing computation that has the power, when one applies the right quantum algorithms, to provide considerable speedups for specific computational tasks.”

Despite the complexity of making firm predictions about the impact of quantum computing on the UK financial services industry at this stage - in terms both of its use cases and what companies will benefit from them – forward looking financial services institutions would be wise to take note of future developments as they happen.

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