Quantum for quants

Wall Street’s latest shiny new thing: quantum computing

A fundamentally new kind of computing will shake up finance—the question is when

The finance industry has had a long and profitable relationship with computing. It was an early adopter of everything from mainframe computers to artificial intelligence. 

For most of the past decade more trades have been done at high frequency by complex algorithms than by humans. Now big banks have their eyes on quantum computing, another cutting-edge technology.

This is the idea, developed by physicists in the 1980s, that the counter-intuitive properties of quantum mechanics might allow for the construction of computers that could perform mathematical feats that no non-quantum machine would ever be capable of. 

The promise is now starting to be realised. Computing giants like Google and IBM, as well as a flock of smaller competitors, are building and refining quantum hardware.

Quantum computers will not beat their classical counterparts at everything. But much of the maths at which they will excel is of interest to bankers. 

At a conference on December 10th William Zeng, head of quantum research at Goldman Sachs told the audience that quantum computing could have a “revolutionary” impact on the bank, and on finance more broadly.

Many financial calculations boil down to optimisation problems, a known strength of quantum computers, says Marco Pistoia, the head of a research unit at JPMorgan Chase, who spent many years at ibm before that. Quantum quants hope their machines will boost profits by speeding up asset pricing, digging up better-performing portfolios and making machine-learning algorithms more accurate. 

A study by BBVA, a Spanish bank, concluded in July that quantum computers could boost credit-scoring, spot arbitrage opportunities and accelerate so-called “Monte Carlo” simulations, which are commonly used in finance to try to model the likely behaviour of markets.

Finance is not the only industry looking for a way to profit from even the small, unstable quantum computers that mark the current state of the art; sectors from aerospace to pharmaceuticals are also hunting for a “quantum advantage”. But there are reasons to think finance may be among the first to find it. 

Mike Biercuk of Q-CTRL, a startup that makes control software for quantum computers, points out that a new financial algorithm can be deployed faster than a new industrial process. The size of financial markets means that even a small advance would be worth a lot of money.

Banks are also buying in expertise. Firms including bbva, Citigroup, JPMorgan and Standard Chartered have set up research teams and signed deals with computing firms. The Boston Consulting Group reckons that, as of June, banks and insurers in America and Europe had hired more than 115 experts—a big number for what remains, even in academia, a small specialism. 

“We have more physics and maths PHDS than some big universities,” jokes Alexei Kondratyev, head of data analytics at Standard Chartered.

Startups are exploring possibilities too. Enrique Lizaso of Multiverse Computing reckons his firm’s quantum-enhanced algorithms can spot fraud more effectively, and around a hundred times faster, than existing ones. The firm has also experimented with portfolio optimisation, in which analysts seek well-performing investment strategies. 

Multiverse re-ran decisions made by real traders at a bank. The job was to choose, over the course of a year, the most profitable mix from a group of 50 assets, subject to restrictions, such as how often trades could be made.

The result was a problem with around 101,300 possible solutions, a number that far outstrips the number of atoms in the visible universe. 

In reality, the bank’s traders, assisted by models running on classical computers, managed an annual return of 19%. 

Depending on the amount of volatility investors were prepared to put up with, Multiverse’s algorithm generated returns of 20-80%—though it stops short of claiming a definitive quantum advantage.

Not all potential uses are so glamorous. Monte Carlo simulations are often used in regulatory stress tests. Christopher Savoie of Zapata, a quantum-computing firm based in Boston, recalls one bank executive telling him: “Don’t bring me trading algorithms, bring me a solution to ccar [an American stress-test regulation]. That stuff eats up half my computing budget.”

All this is promising. But quantum financiers acknowledge that, for now, hardware is a limitation. 

“We’re not yet able to perform these calculations at a scale where a quantum machine offers a real-world advantage over a classical one,” says Mr Biercuk. 

One rough way to measure a quantum computer’s capability is its number of “qubits”, the analogue of classical computing’s 1-or-0 bits. For many problems a quantum computer with thousands of stable qubits is provably far faster than any non-quantum machine that could ever be built—it just does not exist yet.

For now, the field must make do with small, unstable devices, which can perform calculations for only tiny fractions of a second before their delicate quantum states break down. John Preskill of the California Institute of Technology has dubbed these “NISQC”—“Noisy, Intermediate-Scale Quantum computers”.

Bankers are working on ways to conduct computations on such machines. Mr Zeng of Goldman pointed out that the computational resources needed to run quantum algorithms have fallen as programmers have tweaked their methods. Mr Pistoia points to papers his team has written exploring ways to scale useful financial calculations into even small machines.

And at some point those programmers will meet hardware-makers coming the other way. In 2019 Google was the first to demonstrate “quantum supremacy”, using a 53-qubit nisq machine to perform in minutes a calculation that would have taken the world’s fastest supercomputer more than 10,000 years. 

IBM, which has invested heavily in quantum computing, reckons it can build a 1,000-qubit machine by 2023. Both it and Google have talked of a million qubits by the end of the decade.

When might the financial revolution come? Mr Savoie thinks simple algorithms could be in use within 18 months, with credit-scoring a plausible early application. Mr Kondratyev says three to five years is more realistic. 

But the crucial point, says one observer, is that no one wants to be late to the party. 

One common worry is that whoever makes a breakthrough first may choose to reap the rewards in obscurity, rather than broadcast the fact to the world. 

After all, says Mr Biercuk, “that is how high-frequency trading got started”.  

A light shines in the gloom cast by Covid-19

After a grim recession, a strong and healthy recovery is within reach

Martin Wolf

                                                                                                                          © James Ferguson

Covid-19 has been a devastating global shock. But the news on vaccines is really encouraging. The economic impact has also not been quite as bad as feared about half a year ago. 

Moreover, a sane and decent man is soon going to take over as president of the US. Just maybe, the world will emerge from the nightmare sooner and in better shape than many feared.

The latest Economic Outlook from the OECD is less gloomy about the immediate economic impact of Covid-19 than it was in June. At that time, the Paris-based international organisation was so uncertain that it provided not one forecast but two, neither of which was preferred. 

The more optimistic one assumed a “single hit” from coronavirus; the more pessimistic one a double hit. In the event, large parts of the world, notably the US and western Europe, experienced such a double hit. 

Yet the economic outcomes this year are now expected to be better than had been feared in the case of a single-hit pandemic. (See charts.)

This is not to downplay the severity of the impact. 

Global gross domestic product is still forecast to shrink by 4.2 per cent this year, while the GDP of OECD members is forecast to shrink by 5.5 per cent. 

This recession will be the worst since the Depression. The OECD warns that “the median advanced and emerging-market economy could have lost the equivalent of four to five years of per capita real income growth by 2022”.

Yet the outcome might have been worse. Among the big economies, the ones that have surprised most this year have been the US — forecast to shrink by 3.7 per cent this year, against June’s forecast decline of 8.5 per cent in the double-hit scenario — and China’s, which is forecast, amazingly, to expand by 1.8 per cent this year.

Inevitably, these aggregates conceal vast differences among people. The report shows how divergent the effects of the economic shock have been even in Australia, where the pandemic was well contained. 

The crisis barely affected the number of hours worked by professionals and managers. The situation was vastly worse for people in sales, labourers, machinery operators and those working in community services. 

The impact on the world’s poorest has been catastrophic: the World Bank forecasts that 88m to 115m people may be pushed into extreme poverty this year.

What lies ahead? 

In addition to its baseline forecast, the OECD looks at an upside scenario, in which the vaccine is rolled out soon and confidence returns. 

Household savings ratios have been extraordinarily elevated this year: the UK’s household savings ratio is, for example, forecast to jump from 6.5 per cent of disposable incomes in 2019 to 19.4 per cent this year. If this fell back quickly, demand would explode. 

In the downside scenario, confidence remains weak and long-term scarring of the economy severe. The recovery is correspondingly postponed and weak. Even under the optimistic scenario, global output will not catch up with levels forecast back in November 2019 until 2022 — the latest forecast’s horizon. Indeed, the losses may never be recouped.

The proposition that economic scarring will be lasting is plausible. Not only has investment taken a short-term hit, so too have workers and businesses: lost jobs for the former, insolvency for many of the latter. 

The OECD paints a sobering picture of the high proportion of viable businesses that will emerge with distressed debts and negative net worth. This is especially so in accommodation and food, arts and entertainment, and transportation.

The most important path to restoring confidence is to roll out the vaccine as quickly as possible across the world. If necessary, people should be paid to take it. But good economic policy will also be crucial. 

Part of what is needed is to avoid mistakes, such as withdrawing monetary and fiscal policy support prematurely or retreating further into protectionism. 

But it will also be crucial to do things: support people into new jobs and, not least, deal with debt overhangs.

As the OECD stresses, converting debt into equity will be an important part of this effort. 

A recent report from the Institute for Innovation and Public Purpose of University College London recommends public wealth funds as part of an attempt to replace debt with loss-bearing equity. 

The effort to restructure debt must also include emerging and developing countries. 

A great deal of this debt restructuring will fall on the balance sheets of governments of high-income countries. 

No alternative exists.

So far, the global effort to manage the impact of this pandemic can only be described as spotty. 

East Asian countries did far better than western high income countries in managing the pandemic. 

Governments with the capacity to do so were generally successful in supporting their economies. But international co-operation was far worse than after the 2008 financial crisis. 

The effort to create vaccines, however, has been a triumph.

Now we must use that success to bring this nightmare to a close as quickly and as globally as possible. We must take the measures needed to restore confidence and bring economies — changed, no doubt, in important ways — back to life. 

We must not permit a slow recovery that leaves deep and lasting scars on the economic, social and political fabric. 

High-income countries let that happen to themselves after the global financial crisis. 

They must not do so again, especially as a strong and healthy recovery is within their reach.

As Oscar Wilde might tell us, to make a mess of the aftermath of one crisis may be regarded as a misfortune; to do so twice would look like carelessness.

Russia Considers a New Economic Model

Moscow’s tone about the future of the economy has changed.

By: Ekaterina Zolotova

The flaws in Russia’s economy might be too deep to gloss over. At an annual civil forum in Moscow on Saturday, Alexei Kudrin, the chairman of Russia’s Accounts Chamber and finance minister from 2000 to 2011, spoke rather pessimistically about the Russian economy. 

He predicted a drop in economic output this year of 4.5 percent, a significant fall in living standards and that 1 million more people will slide into poverty.

It’s no secret that the Russian economy is under serious stress – made worse by the coronavirus pandemic – but Kudrin’s remarks were unusual for a government that has been promoting the rehabilitation of Russia’s economy by 2022. 

Given the unavoidable economic difficulties ahead, the Kremlin appears to be changing tone and priming the public for more hardship – and potentially a massive economic transformation.

From Bad to Worse

At the forum, Kudrin said Russia needed a new economic model, and it’s hard to argue with that. Oil remains the backbone of the Russian economy. Approximately half its exports are of mineral resources (mostly natural gas and oil), and oil and gas revenues make up about 30 percent  of its federal budget (and that’s excluding tax revenues from oil and gas giants like Rosneft and Gazprom). 

The pandemic, however, has cratered economic activity, and thus demand for energy, and OPEC+ members including Russia agreed to cap production for the time being. In these circumstances, it is difficult for an economy that depends on energy exports to remain afloat. And even after demand recovers, Kudrin said he believes oil consumption will start to decline from its peak in the next 5-10 years, forcing Russia in the 2030s to shift away from oil exports.

One significant challenge is finding an effective economic model that can ensure Moscow’s continued control of its vast territory and far-flung regions. Today, the Kremlin maintains control using not only the security apparatus and political institutions but also the redistribution of budget revenues between regions. 

These revenues, however, depend on the oil and gas industry. Beyond its own borders, Moscow has offered neighbors discounted energy in exchange for greater regional influence and security, defending itself and its sphere from encroachment by China in the east, Turkey in the south and Europe in the west. 

But as the role of oil and gas in the Russian economy declines, the Kremlin will need its new economic model to serve a similar purpose with respect to building and maintaining allied relations with its neighbors.

During his speech at the civil forum, Kudrin suggested that what Russia’s economy needs is “revolutionary deregulation.” He recommended a model he called NEP 2.0 to encourage entrepreneurship, a reference to Lenin’s New Economic Policy of the 1920s following Russia’s Civil War. 

Under the original NEP, the Soviet Union temporarily turned toward state capitalism and away from extreme centralization – with noticeable success. By 1928, the national income had surpassed prewar levels and the material situation of citizens of all stripes had grown more stable. But when Stalin took power that same year he abandoned the NEP, whose legacy remains controversial in Russia to this day.


The situation in Russia in 2020 isn’t even close to as bad as it was in 1921, but it’s going to get worse. Kudrin, after touting Russia’s victory over extreme poverty, said COVID-19 would by the end of the year force another 1 million Russians into destitution. 

In the second quarter of 2020, Russians’ real disposable income fell by more than 8 percent, and it dropped by another 4.8 percent in the third quarter. Leaders in Moscow apparently see the COVID-19 recession as an opportunity to implement transformational change.

A New Model

The Kremlin could, for example, claim that raising living standards and rescuing private small and medium-sized enterprises at this time will be too difficult, given the current extraordinary challenges, and save what’s left of its public funds for future use. 

Indeed, though Moscow has said it’s prepared to help stimulate the economy, it has been hesitant to pile more stimulus on top of its initial efforts to aid Russian businesses. 

In this way, it’s leaving the economic recovery in the hands of the Russian people It believes that the economy will continue to chug along, while the state continues to manage key sectors including much of heavy industry and transport. (During the lockdown, the public sector appeared more stable than the private sector, so state-owned enterprises could also use this as an opportunity to dominate the market even more than they had before.)

Though Russia still has substantial reserves in its national wealth fund – roughly 13 trillion rubles ($170 billion) – it’s not in any hurry to spend them to prop up large Russian corporations. 

It sees relying on SMEs as a better method of stimulating economic recovery, in part because they don’t require the same level of financial support that large firms do, and in part because individual SME owners can’t challenge the Kremlin the same way powerful oligarchs who control massive Russian corporations can. 

So by allowing SMEs to take on the bulk of the responsibility for economic recovery, the Kremlin ensures that its own influence in the regions outside of the capital isn’t overrun by other wealthy interests.

Moscow is also using this time – while many countries’ economies are stalled by the pandemic, and while the United States is preoccupied with the presidential transition – as an opportunity to improve relations with the western buffer states and increase its influence among its neighbors. 

After negotiating a peace deal between Azerbaijan and Armenia over the Nagorno-Karabakh conflict, Russia secured a long-term presence in the South Caucasus by including in the deal a Russian peacekeeping force that will monitor the cease-fire. 

To its west, Russia saw President Alexander Lukashenko elected to another term in Belarus in August, and since the disputed election, he has been looking to Moscow for even more support and cooperation. Meanwhile, the conflict in eastern Ukraine remains frozen, which suits the Kremlin just fine.

One of Moscow’s key tools of projecting influence in the post-Soviet states is the Eurasian Economic Union. The head of the group’s executive body, the Eurasian Commission, said this week that the bloc was moving into a new phase of integration and ready to build projects worth $200 billion. 

A long-awaited draft agreement on gas prices and tariffs on gas transport – which will essentially create a common market for natural gas – is expected next year. 

(Members are still divided on this issue, however, meaning an agreement may be hard to come by. Belarus and Russia will therefore continue to negotiate between themselves while they await a broader deal.) 

In addition, Russia is spending millions to support external economies, even while its own economy struggles. It provides Kyrgyzstan, for example, millions of dollars’ worth of financial assistance. 

It is also considering financing the second stage of a project to increase production of hydrocarbons in Uzbekistan and has provided the country with loans worth $650 million. And it has also issued Belarus $1.5 billion in loans.

In the short term, the Russian economy will survive. In the long term, it will need substantial changes. It continues to depend too much on profits from oil and gas exports, which were previously used as an instrument of influence and control for the state. It now needs to look for new tools with which to maintain state power at the lowest possible cost. 

While the pandemic has presented many countries with enormous challenges, it may also present Russia with an opportunity to conduct an experiment in economic reform. 

And if the experiment succeeds, it could help the Kremlin fulfill both of its key imperatives: to preserve the unity and power of the state, and strengthen its power within the broader region.

Covid-19 Vaccine Contest Isn’t Over

Pfizer and Moderna might be first past the finish line with vaccines, but others could still grab market share

By Charley Grant

Johnson & Johnson could have interim efficacy data on its vaccine candidate in January. / PHOTO: LUIS ROBAYO/AGENCE FRANCE-PRESSE/GETTY IMAGES

The race to develop the first Covid-19 vaccines has been decided. The battle for market share is just beginning.

Regulators in the U.K. have authorized Pfizer PFE 3.53% and BioNTech’s BNTX 6.21% Covid-19 vaccine for emergency use, and U.S. regulators are scheduled to complete their own review as soon as late next week. 

U.S. vaccinations should begin shortly afterward, and regulators will likely authorize Moderna’s MRNA 1.41% vaccine before Christmas.

Both vaccines have been shown to be more than 90% effective in preventing symptomatic Covid-19 in late stage clinical trials, which raises the bar that future candidates will need to meet. 

A vaccine developed by Oxford University and AstraZeneca AZN 0.77% has shown far less impressive results. 

Investors have voted with their wallets: BioNTech’s New York-traded shares have rallied more than 30% over the past month, while Moderna’s stock has more than doubled over that same period.

That reaction makes some sense: After all, initial doses will be sold directly to governments at fixed prices, which means that huge profits are likely next year. And the success of the vaccine programs bodes well for other treatments the companies are developing that rely on similar technology.

Still, investors expecting that these two companies will dominate this huge market indefinitely are getting ahead of themselves. Key questions about the long-run value of each vaccine program are yet to be resolved.

For starters, the rollout of Pfizer and Moderna’s shots will take time: Pfizer has forecast it will manufacture 1.3 billion doses by the end of next year, while Moderna has forecast another 500 million to 1 billion by then. Since both vaccines require two shots for immunization, that would be enough to vaccinate about 1 billion people. 

That is a very rapid pace by normal standards, but urgency has never been higher due to the pandemic.

There will likely be strong demand for other programs that can meet a suitable efficacy bar. 

For instance, Johnson & Johnson JNJ 0.47% could have interim efficacy data on its vaccine candidate sometime in January, which would lead to a request for emergency use in February. 

Importantly, that vaccine requires just one shot, improving its convenience and appeal to the general public. 

Unlike Pfizer’s vaccine it can be stored with normal refrigeration, which makes global distribution a far less daunting proposition, especially at a single dose. 

If that vaccine is safe, those advantages mean it could be useful as a public-health tool even if efficacy isn’t quite as strong as with a two-shot regimen.

What’s more, key scientific questions that will affect vaccine developers’ stock prices have yet to be answered. It is unknown, for example, how long immunity given by any Covid-19 vaccine will last. 

A long-lasting vaccine would be wonderful news for the economy and for stocks most affected by the pandemic. But that would be bearish for vaccine developers: Even windfall revenues and profits won’t get far with investors if those sales are expected to wind down quickly.

For happy shareholders sitting on huge gains, it might be time to protect against the risk of a vaccine plot twist.

 The Financial Equivalent of a Vaccine

While the advanced economies can rely on their central banks to support massive fiscal stimulus in response to the COVID-19 crisis, many developing countries' hands are tied by higher borrowing costs. This is both unfair and unsustainable, pointing to the need for a new, truly global monetary mechanism.

Harold James

PRINCETON – COVID-19 is dramatically widening a global divide that was evident long before the current crisis. Only some countries have been able to cover the costs of the pandemic and lockdowns with large fiscal measures, owing to support from central banks that are buying up large quantities of government debt. 

Most other countries are facing rising borrowing costs and thus cannot afford a robust fiscal response. Indeed, current borrowing terms have split the world into financial haves and have-nots – or, rather, cans and cannots. If this division persists, it may derail globalization entirely.

Rich countries can expect a long period of exceptionally low interest rates, even though government debt has soared at a pace unrivaled in peacetime. 

Increasingly, central-bank money is being considered not so much a liability as a variety of equity constituting citizens’ stakes in a given national endeavor. Such an approach would generate a new vision of what citizenship itself entails, and of how money can hold a community together.

But that option is unavailable to the have-nots. For example, when Turkey tried to respond to COVID-19 with a flood of cheap credit, its currency collapsed, forcing it to reverse course by hiking interest rates. After trying to make access to cheap credit central to his political doctrine, President Recep Tayyip Erdoğan has had to backtrack in order to restore credibility.

Likewise, South Africa is facing ratings downgrades that will sharply limit its room for fiscal maneuver. Argentina, which issued a hundred-year bond as recently as 2017, has moved into default. And emerging markets as a whole have issued more debt, though on a scale nowhere close to that of the developed world.

For poor countries, the fiscal constraints on an effective response to the current crisis are even more obvious, and point to the need for an international program to suspend debt servicing. 

Because borrowing costs figure so highly in these countries’ fiscal accounting, they have spent a mere 2% of GDP responding to COVID-19, compared to 15-20% across rich countries. Not only are poorer countries unlikely to get an ample supply of COVID-19 vaccines anytime soon; they also cannot get the financial equivalent of it.

At a time when there are already deepening concerns about the future of democracy, the absence of a secure connection between citizens and the well-being of their country is troubling. 

In fact, today’s growing global divide looks like a recasting of the late-nineteenth-century gold standard, which enable only a few core countries – Britain, France, Germany, Japan, and the United States – to borrow cheaply. 

And because the ability to borrow was largely synonymous with the ability to acquire weapons and military power, the gold standard bolstered a country’s claim to international dominance, thus driving the imperialist project forward.

Then as now, those on the periphery of the system experienced persistent uncertainty, higher costs, and greater vulnerabilities than any of the dominant powers. While the largest and most ambitious of these marginalized countries did try to join the core, their efforts were constantly threatened by speculative attacks and market panic.

Today’s financially bifurcated world features its own inherent threat to stability, as speculative attacks and devaluations lead to more sovereign defaults on debt denominated in foreign currencies. The inhabitants of these marginalized countries will suffer major declines in their living standards. 

And while that misery could initially benefit consumers in rich countries, a surge of low-price imports would simultaneously pose a threat to domestic manufacturing jobs, creating political pressure for protectionist measures.

One obvious solution would be to issue an international currency capable of offering struggling countries the same kind of support that follows from central-bank operations in the developed economies. In the 1960s, the International Monetary Fund created Special Drawing Rights (SDRs) to address a perceived lack of global liquidity. 

This innovation was built on earlier ideas that had been circulated during World War II, not least John Maynard Keynes’s proposal for a synthetic international currency (“bancor”).

Since the first SDRs were issued, there have been repeated calls for the mechanism to be expanded to tackle issues such as unequal development (in the 1970s), the aftermath of oil shocks (in the 1990s), and the fallout from the 2008 global financial crisis. But this pressure has always been resisted, usually on the grounds that SDR-based stimulus cannot be targeted with sufficient precision.

A targeted version of the scheme would involve using SDRs to buy up poorer countries’ government debt according to some pre-established metric like population size or GDP. 

Here, one can imagine an outcome in which the additional security for government debt would unlock private investment that could be put toward growth-promoting infrastructure projects and the spending needed to deal with the pandemic or other environmental challenges.

This kind of experimental SDR program would look like a limited application of the ambitious monetary union that Europe launched in the 1990s. The euro’s primary attraction for poorer peripheral countries was that it would reduce borrowing costs. 

The risk, of course, was that separating monetary decision-making from fiscal authorities would make it harder for the central bank to support government debt.

In the age of COVID-19, the euro experiment appears to have paid off. Greece and Italy, once at the center of a long-drawn-out debt crisis, can now borrow more cheaply than the US can. 

Ten years ago, many commentators suggested that Italy would have been better off had it followed a currency regime like Argentina’s, which allows for devaluation. It is safe to assume that no one would make that case today.

But Europe is only slowly recognizing which elements are needed to make its monetary union viable over the long term. There is a clear need for more fiscal mutualization and more insurance, but the process remains contentious.

Whether a similar experiment could be mounted at the global level is an open question. 

But it is time to start thinking about a monetary mechanism capable of holding together not just national communities but the entire global economy.

Harold James is Professor of History and International Affairs at Princeton University and a senior fellow at the Center for International Governance Innovation. A specialist on German economic history and on globalization, he is a co-author of The Euro and The Battle of Ideas, and the author of The Creation and Destruction of Value: The Globalization Cycle, Krupp: A History of the Legendary German Firm, and Making the European Monetary Union.