Future Pros And Cons From Quantum Computing

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Australia Investors Beware: Could Quantum Computing Upend the ASX? 

-Quantum computing showing early promise of transformative powers
-Potential to disrupt trading, risk management, and security frameworks
-Existing technologies and solutions could be rendered obsolete
-Australian government launched National Quantum Strategy

By Jason Collins

In recent years, quantum computing has moved beyond the realm of theoretical physics and made its way into real-world applications, albeit slowly.

Given this, it should be no surprise this almost futuristic technology is on the verge of transforming global financial markets. 

While its full impact may be years away, companies, individuals, and institutions in the private and public sectors worldwide are beginning to explore quantum applications in financial services alongside fields like logistics and drug design.

This assessment is based on the insights of Australia’s chief scientist, Catherine Foley, a world-renowned physicist with an interest in quantum computing and its applications.

The groundbreaking developments in quantum technology, perhaps more specifically: quantum computing, are prompting crucial conversations across financial markets.

In Australia, the question is becoming harder to ignore: Could quantum advancements eventually upend the local bourse ((ASX)) and disrupt trading, risk management, and security frameworks? 

Fund managers, investors, market participants at large must answer this question. Admittedly, it is a difficult proposition. To begin exploring answers, individuals need to understand the potential implications of quantum computing and how it affects the ASX in a swiftly shifting landscape. 

Quantum Computing: A Practical Primer for Investors

Investors need to learn the new tools at their disposal constantly, and quantum computing is no different.

Although it poses profound negative implications for the financial market, it can also benefit investors. To better use quantum computing to one’s advantage, one must understand it.

Quantum computing uses quantum bits, known as ‘qubits’, that can exist concurrently in multiple states. This differs from classical computers, which process information in binary (0s and 1s). 

This means quantum computers have the unique ability to solve sophisticated problems significantly faster than traditional super-computers, particularly in data modelling, cryptography, and optimisation.

This makes them a danger –or a boon– to markets like financial markets that rely heavily on speed, data analysis, and security.

Three Key Areas of Potential Disruption

Trading Algorithms and Speed

In today’s trading environment, high-frequency trading (HFT) relies on milliseconds to gain an edge.

While classical trading infrastructure has been optimised to near physical speed limits, quantum computing introduces the possibility of solving complex financial problems, from risk analysis to portfolio optimisation, much faster than traditional systems.

According to Deloitte’s The Quantum Decade report, quantum algorithms could eventually detect subtle, previously invisible trading opportunities buried deep within market data patterns too complex for conventional systems or existing electronic trading platforms, such as those used by the ASX, to uncover.

While the ASX has invested heavily in new technologies, the emergence of quantum-powered analytics could shift competitive dynamics over time, making most other existing solutions obsolete.

Unsurprisingly, with that kind of power, quantum computing may enable firms with early access to extract insights and advantages far beyond what today’s market infrastructure can anticipate.

However, it’s best to remember that these impacts will not happen overnight and will likely unfold gradually. Since quantum computing is still in its early stages and widespread commercial applications are years away, existing digital trading and settlement platforms like the ASX are unlikely to be immediately displaced. 

But that doesn’t mean today’s financial platforms are out of the woods. The key for exchanges like the ASX will be to monitor these advancements closely and invest in quantum-resilient strategies to stay relevant and enticing to investors as the technology matures.

Risk Modelling and Forecasting

Risk management and portfolio construction rely heavily on complex simulation models under normal circumstances and during volatile market conditions.

Quantum computing is believed to eventually have the potential to dramatically influence and accelerate the depth and efficiency of risk simulations. For example, Monte Carlo simulations -among others- could be executed millions of times faster to improve stress testing and market risk assessment.

This evolution will likely have profound implications for the Australian financial system, which is shaped by regulatory oversight from APRA and ASIC. Experts believe, as quantum-enabled risk modelling becomes more powerful, slower stress testing frameworks and traditional Value-at-Risk (VAR) models may no longer suffice. 

If asset managers, investment banks, and institutions trading on platforms like the ASX fail to adapt, they could be at a competitive disadvantage. Essentially, institutions that embrace rather than shirk quantum-enhanced risk management in its early stages stand to gain a significant edge regarding stress response, portfolio resilience, and regulatory compliance in a more complex market environment. 

Additionally, while these advances could reshape traditional risk models, broader financial applications of quantum technology are also beginning to emerge.

Quantum Computing and the Future of Market Security for the ASX

Beyond risk modelling, one of the most immediate concerns surrounding the use of quantum computing is its potential to break the cryptographic systems underpinning today’s financial systems.

It might seem unbelievable, but according to cybersecurity experts, a sufficiently advanced quantum computer could, in minutes, crack encryption that would take conventional supercomputers millions of years to defeat.

Despite its comprehensive security measures and encryption, the ASX would not be immune to these risks. In the event of a quantum-enabled attack on the ASX, encrypted trading data, user credentials, and settlement instructions could be exposed, leading to systemic threats to market integrity and investor trust, no matter how far in the future.

With this in mind, it should be no surprise KPMG has already warned quantum computing could render existing encryption tools ineffective faster than many investors can anticipate. Luckily, Associate Professor Ron Steinfeld from Monash University notes governments and standards bodies worldwide are already preparing for the security challenges large-scale quantum computing will bring.

Yet, transitioning platforms like the ASX to quantum-resilient systems will require stealthy planning, collaboration, and investment. In addition, any hesitation in adopting post-quantum security protocols could expose Australia’s financial infrastructure and investors to vulnerabilities with far-reaching consequences.

Quantum Advantages

Quantum computing as a whole offers disadvantages for the financial sector, especially for trading platforms like the ASX.

Yet, there are upsides to using this technology, considering it offers transformative capabilities that might benefit the financial system. KPMG Australia notes quantum computing can revolutionise ‘financial modelling’ and risk analysis alongside energy, AI, and drug research applications. 

To understand this, think of it this way: One day, Australian banks and asset managers could use quantum computing algorithms to improve fraud detection with complex pattern analysis beyond what is currently possible. These same banks and asset managers could even use the power of quantum algorithms to perform ultra-fast scenario simulations for portfolio management or to reshape how risk management is determined. 

In short, quantum technology might unlock new levels of insight and efficiency in finance, boosting competitiveness for those who adopt it. Beyond this, embracing quantum computing also offers strong economic opportunities. 

According to a CSIRO white paper published in May 2020, Australia’s emerging quantum technology sector is forecast to support around 16,000 jobs and generate over $4bn in annual revenue by 2040, with quantum computing being the most promising profit driver. 

Additionally, according to Dr Foley, quantum computing could spur breakthroughs, leading to higher profit gains across industries, including finance. Foley: “Quantum computing has the potential to contribute more than $2.5bn to the economy each year while spurring breakthroughs in drug development, more efficient industrial processes, and accelerated machine learning systems.” 

By embracing quantum technology in its many forms, Australia could gain a competitive edge at home and abroad. Not to mention, with significant profits, policymakers are keen to capitalise. For this reason and to ensure safety in a cyber landscape, the Australian government introduced its National Quantum Strategy. 

This governmental strategy outlines Australia’s overarching plan to become a global leader in the space by 2030. Investors might also find it noteworthy that quantum technology is listed as one of the nine priority critical technologies in Australia’s Action Plan for Critical Technologies. The listing further highlights its importance to Australia’s future economic prosperity.

Quantum Computing and the ASX

Quantum computing represents by no means an immediate threat to the ASX or Australian capital markets. However, since it can reshape parts of the financial landscape and pose risks in the near future, investors must keep up with technological developments.

They must also advocate for regulatory readiness, as it will help ensure operational adaptability in the financial markets.

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