Readers of this blog have confessed concern over my focus on computers that are faster and faster (http://seekingalpha.com/article/223127-the-new-world-order-smaller-and-faster) and the blue-sky idea of quantum computers. I stand by this interest.
I focus on these developments because finance and the future of banking are going to be significantly impacted by faster computers, their greater capacity to store data, and to the ubiquitous presence of these things in our lives.
So we read: “A new photonic chip that works on light rather than electricity has been built by an international research team, paving the way for the production of ultra-fast quantum computers with capabilities far beyond today’s devices.” (See “Computers Set for Quantum Leap” in the Financial Times: http://www.ft.com/cms/s/0/8c0a68b0-c1bc-11df-9d90-00144feab49a.html.) The technical results of this research are being published today in the journal Science.
Many people in the field felt that it might be 25 years before we saw a functional quantum computer.
“We can say with real confidence that using our new technique, a quantum computer could, within five years, be performing calculations that are outside the capabilities of conventional computers,” claims Jeremy O’Brien, director of the England’s Centre for Quantum Photonics, who led the project.
Quantum computers are going to happen. Governments cannot afford to miss out being a part of the quantum revolution in computers. Governments must have quantum computers to keep secrets. Governments must also have quantum computers for defense purposes…a country like the United States cannot afford to be second in this field.
Therefore, “Hundreds of millions of dollars” are being spent “in the field.”
Why is this so important in finance?
Finance is information!
To see that this is so take a look at the book “The Quants” (I reviewed this earlier for Seeking Alpha: http://seekingalpha.com/article/188342-model-misbehavior-the-quants-how-a-new-breed-of-math-whizzes-conquered-wall-street-and-nearly-destroyed-it-by-scott-patterson.) In this book we see how closely the fields of quantitative finance and financial engineering have always been to information science and information theory. For example (I quote from my book review):
“It is interesting to me that the beginning of the story Patterson (the author of ‘The Quants’) tells is how math/physics whiz Ed Thorp, the Godfather of the Quants, started out on the path to ‘Quant-dom.’ Thorp, as a new member of the MIT staff, took some of his early work on how to predict outcomes of roulette wheels to a well-known member of the MIT faculty named Claude Shannon.
Shannon is known as one of the founding fathers of Information Theory, a theory that has to do with the transmittal of information and the ability to receive and discern the message conveyed in the information transmitted.”
Furthermore, “Now let me fast forward to the quant fund group known as Renaissance Technologies and its star fund Medallion. This whole group was created by Jim Simons and it is ‘the most successful hedge fund in history.’
What kind of team did Simons pull together to staff his funds? Cryptographers and people trained in speech recognition; in essence, people trained in Information Theory. They were trained to detect hidden messages in seemingly random strings of code.”
The development of computer technology and data storage in the 1950s resulted in the massive change that took place in the field of finance in the 1960s. Given the availability and greater accessibility of data related to the stock market, researchers on university campuses produced dissertation after dissertation on performance in the stock market.,
The field of finance has never been the same.
The power of quantum computers is hard to imagine. These computers will be able to make calculations that are only dreamed about in “far out” science fiction novels. These computers will be able to access data bases containing information from almost unlimited sources. The possibilities are mind-boggling.
Will these computers be used in finance?
If there is a chance to “make-a-buck” or several billion bucks, they will be used. Finance is always looking for an edge. Faster and more powerful computers are always a potential source for finding an edge.
But, back to one of my fundamental predictions: finance and financial institutions over the next five to ten years will be something substantially different from what we know now. What happened to finance and financial institutions over the past fifty years is only a prelude to what is going to take place.