Quantum Computing Could Reinvent Finance. IBM and HSBC Take the First Step With Bond Trading.

IBM quantum computers powered by its Heron processor were linked with conventional machines as part of an experiment conducted alongside HSBC. (COURTESY IBM)

Key Points

About This Summary

• HSBC utilizes IBM quantum computers to predict financial market behavior, specifically in bond trading.
• An algorithm using quantum computing reduced errors by 34% in predicting bond trade fulfillment compared to classical methods.
• This collaboration marks the first instance of quantum technology being applied to real industry data, according to IBM.

HSBC said it has used quantum computers from International Business Machines to predict the future behavior of financial markets.

Researchers showed how an algorithm used to predict whether a bond trade would be filled saw a 34% reduction in errors compared to conventional methods. The results were cited in a non-peer-reviewed paper submitted to Cornell University’s research-sharing platform arXiv on Sept. 22.

Computers powered by IBM’s Heron quantum processor were integrated with classical, bit-based machines and artificial-intelligence models in a bid to make sense of trading data and predict how the European market would behave.

“This is essential for algorithmic bond trading, in which a highly refined algorithm automatically executes a high-volume of transactions that sell and purchase bonds,” HSBC told Barron’s ahead of the announcement. “In a live market, this performance would have led to a more efficient algorithm and an increase in trading profits.”

IBM’s role in the experiment is unsurprising, as it is one of the established names in quantum computing. The company first demonstrated a working quantum computer in 2000. Since then, it has earned a reputation as one of the most formidable names in the industry.

But HSBC itself has taken steps to embrace the nascent technology. The international bank has a robust quantum program and works with a number of partners including Quantinuum, the smaller, privately held IBM rival that is majority-owned by Honeywell International.

“Working with HSBC, I think, is one of the best examples of us putting science and practice together,” said Jay Gambetta, IBM’s vice president of quantum. “This achievement is important because it’s the first example of using quantum on real industry data.”

As systems get larger and faster “we are only going to see more and more of these examples,” Gambetta added. IBM said it remains on track to release the first fault-tolerant quantum supercomputer before the end of the decade.

Competition is stiff, and the market reaction was evidence of that. IBM shares gained 5.3% on Thursday, putting the stock on pace for its highest close since July 23 and its largest same-day percentage increase since April 9, according to Dow Jones Market Data.

Quantum industry peers weren’t seeing a similar boost. IonQ , D-Wave Quantum , and Rigetti Computing declined 8.9%, 6.8%, and 2.5%, respectively.

With a lack of impressive financial data to trade on—none of the pure plays are profitable, and their revenue materializes in large, irregular chunks —investors take what they can get. Perhaps IBM’s advancement in the quantum race is a sign that things are heating up, putting pressure on smaller players to make their own advances.

Investors may be tempted to pit quantum peers against each other, but experts such as IBM’s Gambetta envision a more inclusive environment. “I think the ecosystem is going to be healthy, and it’s not going to be one person controlling everything,” he said in an interview with Barron’s earlier this year. “We’ve seen that in the classical space, and I think that’s going to happen in the quantum space.”

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com