Complex quantum computing is being aimed at complex financial risk

A new quantum algorithm could eventually make it easier for banks to manage the systemic risk that helped bring down the financial system more than a decade ago.

Why it matters: Major financial institutions spend huge computing resources in calculating the systemic risk that may be contained in their portfolios. Replacing classical computing with a quantum architecture could allow them to do it faster and cheaper.

What's happening: Zapata Computing, a Massachusetts-based quantum software company, and the Spanish bank BBVA are collaborating to develop a quantum algorithm to target credit valuation adjustment (CVA).

• CVA is a change to the market value of derivative adjustments that account for credit risks from counterparties. It was introduced as a new requirement for banks following the 2007–2008 financial crisis, when the banking system was almost brought down because of failure to account for the risk.
• This kind of analysis is so enormously complex that some major banks "spend half of their compute budget chasing this problem," says Christopher Savoie, Zapata's CEO and founder. "It's a big financial burden right now."

Where it stands: Zapata's algorithm outlines the hardware specifications future quantum machines would need to run it, which gives computer makers both proof of concept and a target to shoot for.

How it works: A quantum approach, says Zapata CTO Yudong Cao, can "actually bend the curve by taking advantage of unique aspects of quantum mechanics that doesn't have any classical counterparts."

• While current-generation quantum computers are still too error-prone and small to execute Zapata's algorithm, if hardware can be improved, Cao says the algorithm could lead to a "hundred to thousandfold reduction in the amount quantum resources required" to carry out the necessary calculations.

"If you can have an output with the same accuracy in a simulation of possible future scenarios for example in 5 hours instead of 25 hours, you will have 20 hours more to analyze which decision is better."

The bottom line: Quantum computing hardware gets most of the attention — possibly because it looks like this — but quantum software is just as important.