Decoding The Stock Market With Quantum Computers

Just when it seems like the world of finance could not get any more complicated, some industry insiders believe the era of the quantum computer is imminent.

In a recently published paper, Ovidiu Racorean, head of Advanced Mathematical Methods for a top British hedge fund, suggests that quantum-based technical stock market analysis (QTA) could be coming to Wall Street very soon.

Racorean takes advanced mathematical concepts that go into building and understanding quantum computers, such as braids, knots and knot invariants, and applies the principles to the stock market. In his paper, Racorean shows parallels between the motion of stocks and the motion of tiny particles called "non-abelian anyons."

Racorean believes that the probability of a future market move could theoretically be determined by performing advanced quantum computations. QTA could also be a potential alternative to traditional technical analysis of stocks.

“QTA will assess the most probable outcome for the market in any instance,” Racorean believes, “such that the potential trader can choose to trade the most probable future state of the market.”

What Is A Quantum Computer?

A quantum computer is not the latest Apple Inc. AAPL i-gadget. A quantum computer is fundamentally different from any other type of computer.

Binary code, a method of storing information as a series of ones (1) and zeros (0), is the basis for all “conventional” computers. However, quantum computers utilize “qubits,” a unit of information that can be a “1,” a “0,” or both a “1” and a “0” at the same time.

Qubits are based on the quantum mechanical principles that describe the dual particle-like and wave-like behavior of matter and energy on an extremely small scale.

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In theory, quantum computers, which are already being commercially produced by companies such as D-Wave Systems, Inc., should be able to process information at much higher speeds because of their ability to simultaneously handle more combinations of bits than traditional computers. 

In 2013, one of D-Wave’s computers performed a complex mathematical calculation 3,600 times faster than the best of three leading algorithms running on a high-end traditional desktop computer.

Quantum Computers On Wall Street

What does all this science have to do with Goldman Sachs Group Inc GS? Vern Brownell, CEO of D-Wave, was chief technology officer at Goldman Sachs for 11 years.

Goldman is one of several big-name investors in D-Wave, along with the likes of Amazon.com, Inc. AMZN founder Jeff Bezos. On its website, D-Wave lists “financial analysis” as one of the capabilities of the D-Wave Two quantum computer, and Brownell admits that D-Wave is “working with companies at the top of their game in financial analysis.”

Quantum computers should theoretically be able to run advanced portfolio optimization algorithms, such as the one Racorean describes in his paper. It’s this type of potential that lures the interest of big Wall Street institutions such as Goldman Sachs to the world of quantum computing.

However, Racorean believes that retail investors should not get too excited about the potential to profit from this technology any time soon, as the fee for access could be staggering. “It is easy to imagine that only the wealthiest institutional investors will benefit from the incredible power of quantum financial algorithms.”

When Is The Quantum Wave Coming?

In some fields, the quantum wave is already here. Google Inc GOOGL and NASA teamed up to launch the Quantum Artificial Intelligence Lab just last year.

Microsoft Corporation MSFT and International Business Machines Corp. IBM are also already funding major quantum computing research.

Racorean believes that next year will be the “Year of the Quantum Computer,” and he hopes to have results of his quantum simulation of the stock market by the end of 2015.

Wayne Duggan holds a short position in Amazon.com.