Quantum Finance Landscape

Quantum computing holds great promise for addressing numerous challenges across various domains, and the financial sector is no exception. With its increased computational power, quantum computing can significantly enhance the efficiency and capabilities of stock exchanges, banks, and technical analysts by enabling more sophisticated simulation and optimization models. Many major banks are already exploring quantum technology to tackle issues such as fraud detection, credit card disbursal explainability, option pricing, and stress testing assets.

This chapter delves into the role financial services play in society and examines the key challenges they face that could potentially be addressed by quantum computing. It provides an introduction to different types of financial institutions and highlights the critical problems within the financial services sector. Additionally, the chapter outlines the necessary preparations for creating a work environment that...

Introduction to types of financial institutions

The financial industry is integral to the health and growth of a country’s economy. This sector is responsible for providing essential financial services to both businesses and retail consumers. As depicted in Figure 3.1, the financial sector is a diverse ecosystem, encompassing banks, investment houses, insurance companies, real estate brokers, consumer financing firms, mortgage lenders, and real estate investment trusts (REITs). These organizations collectively contribute to the stability and expansion of the economy.

In addition to the provision of loans and mortgages, the financial industry plays a critical role in offering insurance services to individuals and enterprises. This ensures that both personal and commercial assets are protected against unforeseen risks, fostering a sense of security and stability within the economy. Employment opportunities within the financial sector are vast, with millions of people working...

Key problems in financial services

Financial services can be categorized as banking, financial services, and insurance. Banks must manage customer expectations, maintain loan quality, and prevent customer churn, while financial market participants must regularly perform stress tests to avoid future troubles. Financial services must stay up to date with technological advancements to meet evolving client needs. Insurance companies must disburse claim amounts correctly and quickly to genuine customers, adhere to regulatory compliance, and invest in robust fraud detection and prevention measures. Overcoming these challenges requires ongoing investment in technology, staff training, and a commitment to providing high-quality services to clients.

Banking services provide depository and lending services to customers via commercial and investment banks. They must manage customers’ expectations and arrest customer churn in this dynamic environment of interest rate fluctuations. On...

Summary

Financial institutions, which encompass a broad spectrum from retail and investment banks to insurance providers, play an indispensable role in facilitating transactions and risk management. Asset management, a critical function, often employs stress testing and regulatory controls to evaluate and mitigate risks associated with assets such as money market funds, a process that may be expedited and enhanced by quantum computing in the future. Portfolio optimization, another foundational aspect of financial services, balances anticipated returns against associated risks, increasingly utilizing advanced technologies such as artificial intelligence (AI) and machine learning (ML). As these technologies become integral to the investment landscape, it is crucial to thoroughly comprehend the implications of such automation. The adoption of AI and ML by financial institutions aims not only to enhance customer experiences and optimize business operations but also to maintain ethical...

Further reading

Some of the topics that were briefly explained in this chapter have extensive literature behind them. Financial services have been around for a while and many resources can be found for those new to the field and willing to learn more details about the topics that we covered in this specialized material on financial quantum computing.

Problems and techniques around derivative pricing, portfolio optimization, and fraud detection will have some specific literature referenced in their corresponding chapters. Additionally, the next chapter will provide in-depth coverage of the techniques employed in computational finance.

For those wanting to better understand the complex ecosystem of the banking sector and how it operates, some interesting references on financial markets are the publications by Pagano (1993) and Bond et al. (2012).

Those interested in ethical and fairness terms relating to the financial market may find the paper by Sherfin & Statman (1993...

References

Bond, P., Edmans, A., & Goldstein, I. (2012). The real effects of financial markets. Annu. Rev. Financ. Econ., 4(1), 339-360.

Cartea, Á., Jaimungal, S., & Penalva, J. (2015). Algorithmic and High-Frequency Trading. Cambridge University Press.

Jobin, A., Ienca, M., & Vayena, E. (2019). The global landscape of AI ethics guidelines. Nature Machine Intelligence, 1(9), 389-399.

Pagano, M. (1993). Financial markets and growth: An overview. European economic review, 37(2-3), 613-622.

Shefrin, H. & Statman, M. (1993). Ethics, fairness, and efficiency in financial markets. Financial Analysts Journal, 49(6), 21-29.

Zibriczky, D. (2016). Recommender systems meet finance: a literature review. In Proc. 2nd Int. Workshop Personalization Recommender Syst (pp. 1-10).