Quantum kit offers HFTs ‘100-fold’ speed boost

After spotting FX arbitrage opportunities, new tech faces real-world test in Japanese stocks

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High-frequency traders (HFTs) are being offered a shortcut to a world of quantum-powered arbitrage. Researchers at Toshiba have developed an algorithm – derived from quantum theory – that runs on conventional super-fast chips and is about to get its first test drive in a live market. If it goes well, the technology could be on sale within two years.

The Japanese tech giant calls its equipment a Simulated Bifurcation Machine. Kosuke Tatsumura, chief research scientist at Toshiba, claims the SBM “is 100 times faster than trading systems based on conventional computers.”

That claim is based in part on research in which the SBM consistently picked out the best arbitrage opportunities in foreign exchange markets. None of those trades were executed. In the SBM’s coming trial, it will be used by Dharma Capital – Japan’s only homegrown HFT – to trade equities at the Tokyo Stock Exchange.

Akiyoshi Shiotani, Dharma Capital founder and chief executive, says the experiment is scheduled to start within a few months and will make a new set of “unprecedented methodologies and novel strategies” available to HFTs.

For HFTs, the allure of super-fast quantum computers has so far been contained by operational constraints. Due to their exploitation of quantum mechanics, the computers can handle a vast number of calculations. But such equipment is prone to errors if it gets too warm, meaning it must be refrigerated.

Banks and others are experimenting with quantum technology by renting machines that are hosted in the cloud, exploring their use in fields such as settlement, pricing and risk management. This approach is no good for HFTs – the opportunities identified by a cloud-based quantum machine might have disappeared by the time an order could be sent to a trading venue and executed. Typically, HFTs and other firms that want to minimise trading latency will pay for their machines to be co-located at the venue.

Toshiba gets around the problem of how to install a quantum computer in an exchange with an approach that relies on vamped-up traditional hardware – chips known as field-programmable gate arrays, which are already widely used in high-speed trading.

“Imagine you want to use a real quantum computer: you would have to bring a huge refrigerator into the stock market,” says Tatsumura. “That’s not so easy. But our machine looks just like a conventional server. That’s why we think our technology is a very practical and reliable one that can be used for real trading.”

If successful, Tatsumura believes the SBM could become commercialised for production and sold to trading businesses in as little as two years.

Good arbs, bad arbs

Toshiba’s research in FX markets, completed in 2019, showcased the SBM’s promise in cross-currency arbitrage. Using one month of tick data for eight currencies, the SBM was able to spot opportunities to hop from one currency to another and capture mispricings that appeared in the market for the briefest of intervals – in one example, the machine saw a chance to make money by selling euros for Japanese yen, sell yen for US dollar, sell dollar for Swiss francs, and finally sell the francs to buy back euros at a profit. According to the research, among the available currency combinations, the SBM spotted the most profitable path 90.96% of the time.

The theoretical orders generated by the trading algorithm were issued within 30 microseconds, a response shorter than the average one-millisecond window for which the opportunities existed.

The next step is to move from spotting opportunities to placing and executing actual trades. 

“Two years ago, we demonstrated it was possible to issue orders within 30 microseconds, but that’s not enough,” says Tatsumura. “Now we have to prove our speed is enough for execution, not just for the issuance of the order.”

To achieve that aim, Toshiba has put together an integrated trading system comprised of a market data ‘parser’, which interprets inputs to the computer, plus an order handler and the SBM itself.

Dharma Capital’s strategy will target statistical arbitrage opportunities in Japanese equity markets. As an example, this could involve the trading of pairs of stocks that are closely correlated for fundamental reasons. It relies on mean reversion – buying the underperforming stock in a pair on the expectation its price will rise, shorting the outperformer, or doing both simultaneously.

Unlike the riskless profits available within a network of currencies, equity statistical arbitrage is not a sure thing. Breaking news can cause temporary mispricings to appear, as market participants react differently to that news – but there is no guarantee the historical relationship between the stocks will reassert itself, or that it will do so quickly.

Toshiba argues that enabling firms to quickly identify and eliminate temporary mispricings will aid market efficiency and liquidity. Dharma Capital’s Shiotani says the use of quasi-quantum computers in high-frequency trading will “contribute greatly to the stability of financial markets by connecting vast varieties of financial products with each other efficiently and rationally.”

Sceptics may worry that a new speed advantage for HFTs would instead be used to the detriment of slower-moving market participants.

Toshiba and Dharma Capital say the technology deployed in their experiment could also be applied to other electronically traded products, including bonds, commodities and derivatives.

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