Before we get going, just in case you didn’t see them during the last two weeks, here are our year-end round-ups of a few topics that you might find of interest: machine learning, natural language processing, app interoperability, Asia innovation, and lessons learned from the coronavirus.

We hope that these stories serve as useful one-stop-shops that provide a wide variety of actual, real-world initiatives and projects currently underway in the capital markets. Enough of that—let’s get to it.

Quantum Exploration

What’s the point? This question could be used as a response to any number of questions and directives, but for the purpose of this column, it has to do with quantum experimentation.

In October, we published a story documenting some of the “quantum fatigue” setting in at banks. Essentially, off-the-shelf quantum tech is still years away, leaving some bank execs to question why they’re taking the time to invest in quantum experimentation today. “Two years ago, I was a lot more bullish,” said Jezri Mohideen, chief digital officer for Nomura’s wholesale businesses. And as coronavirus-related challenges have diverted staff and resources toward more pressing day-to-day needs, some innovation projects are taking a back seat.

Others view these initial projects as vital to the advancement of quantum and making sure that when these computers are one day available, they are built so as to fit the needs of financial institutions. “It’s a voyage of discovery that could lead to radically-novel solutions for some of today’s greatest computational challenges,” said Lee Braine, director of research and engineering at Barclays.

William Zeng, head of quantum research at Goldman Sachs, agrees. I spoke with Zeng a few days before Christmas, and we published a story this past week that offers a look at how the bank is working with IBM on a project to prove quantum advantage for derivatives pricing.

He says that the quantum research group at the Wall Street giant “really just got started” last year on its exploration of this bleeding-edge technology. He says that there are a lot of hardware providers—including IBM—who are looking for targets for their development roadmaps. What Zeng and his team wants to show is that there are a lot of applications in financial services that provide for great targets for quantum advancement, but they have to prove that with concrete numbers. This recent project with IBM does just that for derivatives pricing.

Additionally, he says, if banks can show the use-cases and benefits for quantum advancement in finance, there’s a lot of public and private funding and grants that are targeted specifically at quantum computing. Finance doesn’t want to fall too far behind in the funding and discovery race, because that means that when quantum becomes a reality, they’ll have to play catch-up and that funding might’ve dried up by then.

“There’s a really big ecosystem out there—there’s probably $22 or $23 billion in government funding that’s been announced globally in recent years, with maybe a little more than $1 billion in private VC investment,” Zeng says. “There’s a lot of resources going toward building this technology and so we want to help guide that towards the opportunities that we see in finance.”

To his point, the National Quantum Initiative (NQI) Act was signed into law in the United States in 2018. The legislation aims to help lay the groundwork for quantum advancement and commercial quantum computers. As Dr. Charles Tahan, assistant director of Quantum Information Science at the Office of Science and Technology Policy, told federal technology news outlet Nextgov, they first must better understand for which applications quantum computers can be used.

“I would say in five years, something we’d love to see is … a better idea of, ‘What are the applications for a quantum computer that’s buildable in the next five to 10 years that would be beneficial to society?’” Tahan said.

Through the NQI, the Department of Energy has announced up to $625 million over the next five years to establish two to five multidisciplinary Quantum Information Science Research Centers. Additionally, the White House’s 2021 fiscal year budget includes $860 million invested within two years for quantum development.

These are just a few examples of public funding for quantum development—and that’s just in the US—but there are a range of industries that will be fighting over these funds, including medical and health care, cybersecurity, defense, and energy. The financial services industry is going to have to coordinate its attack if it wants to wet its collective beak.

Also, while quantum computing might be heading into the trough of disillusionment for some, there are reasons to believe that the scientific community is actually heading into a period of renaissance. First, as mentioned before, there’s the money. Increased funding and decreased regulation can lead to rapid advancements—the fact that Covid-19 vaccines went into people’s arms before the end of 2020 is proof of that.

Additionally, as funding is poured into this space, other scientific disciplines are taking notice and joining the fray. At the same time, the academic community is growing and the first generation of students graduating with degrees specific to quantum are filtering into the job force.

“There are a lot of really smart people in this field, but the pond is still very small—we’re still in early days,” Zeng says. “The first master’s degree programs and programs in quantum engineering are just happening now. The amount of global brainpower that is going to start to look at the problems faced here is going to increase very dramatically as the potential becomes more concrete. There are things that are open questions, that haven’t been ruled out, that could be found.”

For example, quantum error correction—which is used to protect quantum information from errors due to de-coherence and other forms of quantum noise—can be done completely differently, Zeng says, as outside disciplines can bring in new kinds of algorithms. “The growth of the field is very rapid right now,” he says.

Stefan Woerner, head of quantum applications for IBM Quantum, worked with Zeng’s team for their first benchmark report on derivatives pricing, and he agrees with Zeng, adding that as more brainpower enters the field, advancements could quicken.

“People from mathematical optimization are now starting to look more and more at quantum computing as one tool to solve that problem,” Woerner says. “It’s growing out of theoretical physics, where it originated, into all these different application fields. This can give the whole field a boost by having not only more brain power, but also way more diverse brain power with completely different points of view and angles to approach a problem. I think it will be really exciting seeing that continue.”

Now is not the time to sit on the sideline. If banks fall behind in the race, and the tipping point for quantum advancement tips quickly, they could find that the gap between their classical computers of today and everyone else’s quantum computers of tomorrow has turned into a canyon.

A New ESG Push

Speaking of falling behind (transition!), under the Trump administration the United States has given up its seat at the table when it comes to conversations around climate change and sustainability on a global scale. Fortunately, because President Donald Trump was so ineffective on the legislative front, he was unable to get Congress to pass actual long-lasting laws for his anti-environment crusade. Executive orders, unlike laws, can be easily overturned, and President-elect Joe Biden has indicated that he will dump most—if not all—of those executive orders, posthaste.

Much like global temperatures, ESG is hot right now, and getting hotter (sorry…couldn’t help myself). The challenge for buy-side firms is making sense of this rising sea of information (sorry…did it again). There is hope—for some, fear—that the Biden administration will introduce legislation around climate-risk disclosures for corporations and create mandates/incentives around diversity and equality. But while Biden’s next four years as president are unlikely to be as tumultuous as the previous four years under Trump, it’s impossible to know how much success Biden will have when it comes to introducing a pro-environment and equality agenda. While Trump may be gone, as we saw during this disgraceful last week, his voice will be heard for years to come (just thankfully not on Twitter).

The question remains, though: Just how much will Biden’s presidency be beneficial for the ESG industry and data providers?  

Reb Natale recently spoke with the chief investment officer of PanAgora Asset Management, as well as its director of portfolio management and sustainable investing, to try and get an answer to this question. The Boston-based quantitative asset manager has been a leader when it comes to incorporating ESG-driven principles in the investment process.

As Mike Chen, the director of sustainable investing, told Reb, there’s already a sea-change underfoot when it comes to how clients want to deploy the E, the S, and the G for their investment strategies.

“Before Covid-19, I think that environmental and climate change issues were probably first among equals [the other equals being social and governance factors]—rightly so, because it’s really something that affects everybody, no matter if you’re rich or poor, if you live in North Africa or the eastern part of the United States; nobody escapes from it. But what Covid has done is made more prominent the inequality that exists in our society in so many dimensions. Not just gender, but racial, in income, in housing,” he said. “We’re definitely getting inquiries from potential investors, from potential clients, asking, ‘Can we come up with products that are more focused on social issues?’ Or, ‘How do you think about that?’ So I think that ESG is having a moment. And, because of Covid, because of racial tensions, I don’t think that moment is going to disappear once Covid is over.”

I think that this is going to be one of the interesting things to keep an eye on over the next two years before the mid-term elections of November 2022: Does Biden use the bully pulpit to focus more on environmental and climate-change issues, or will he focus on inequality? I know that some of you are yelling “BOTH!” right now, and in a perfect world, that would be the case. At the end of the day, though, a president’s time in office is fleeting, and there is only so much goodwill and political capital that can be spent.

So I’m interested to see how the decisions that the Biden administration makes affect ESG data providers and how buy-side firms change their ESG plans for 2021 and beyond. Is ESG a marketing tool, or is it a set of dials that can be turned to help a firm truly mitigate risk and maximize returns? We had four years of an administration that basically did not believe in climate change or inequality (at least for anyone that wasn’t a loyalist of Trump)—so it stands to reason that if ESG data actually provides value to investors, ESG should take on greater importance under an administration that will make at least certain segments of ESG an important piece of its overall legislative agenda…no?

Or, maybe I just don’t fully understand how ESG data affects stock selection. Think I’m missing something, let me know: anthony.malakian@infopro-digital.com.

January 6, 2021

Not that you care, but I feel the need to write just a little bit on what happened this past week and why I have hope for the future.

The scenes at the Capitol Building in Washington, DC, were embarrassing and outright disgusting. I truly hope that every single seditionist that entered that building are brought to justice and put in jail. If we can lock millions up for petty drug offenses, I’m pretty sure we can make some room for a thousand-or-so treasonous pieces of shit. And yes, if you happen to be reading this and you were one of those who stormed the Capitol, I think you are a treasonous piece of shit.  

With that bit of vitriol out of the way (transition!), I’m also a perpetual optimist. I actually believe that this country is going to come back stronger from these events, though that doesn’t mean that there won’t be some dark days ahead. My hope is that this schism in the Republican Party—and America as a whole—will allow true conservatives to have a voice again on the national stage, and many in Congress on the right will vocally and vociferously eschew Trumpism. It’s clear that Trump is not going away and his cult will continue to follow his lead, but I think that many Republicans are coming around to the fact that they just lost the presidency and the Senate—so what value is there in praying at the altar of Trump?

It’s my belief—my hope—that many of the 70 million+ Trump voters simply held their nose when they went to the voting booth. Sure, they hated the way he acted, but he changed the judiciary for decades to come, not to mention the Supreme Court. A lot of conservatives care more about the judiciary than even the executive branch—you own the courts, you control policy and prevent liberal overreach. I don’t believe that 70 million Americans are like the traitors we saw on Wednesday; I think that they just care more about policy than moral character, and the left-wing agenda scares the shit out of them. So in the future, Republican politicians might not get the support of the Trump zealot, but they’ll win back the moderates like me—I protest voted in 2016 and voted for Biden (more as a statement than endorsement) in 2020.

This past Wednesday woke up many on the right. Essentially, I think millions of Republicans are saying, “OK, Trump, you swung the courts further in our favor—now get the fuck out of here.”

Finally, I’ve also read and heard a lot about just how fragile our republic is—I actually think these last four years have shown just how strong it is. After the riot was quelled on Wednesday, legislators went and affirmed that Joe Biden will be sworn in on January 20. We’ve had months and years of a man who would say and do anything to keep his power, but at the end of the day, voters told Trump that he’s fired and our constitution has held despite the efforts of not just Trump, but a handful of politicians like senators Josh Hawley and Ted Cruz—hopefully Americans vote these cowards out, too.

That’s all I have to say about that. When the White Horse opens back up, I’ll happily discuss in more detail over a few pints.

The image at the top of the page is “The Great Wave” by Katsushika Hokusai, courtesy of the Art Institute of Chicago.