Quantum Trading

Faisal Shah Khan, Ning Bao

High-frequency trading (HFT) offers an excellent use case and a potential killer application of the commercially available, first generation quasi-quantum computers. To this end, we offer here a simple game-theoretic model of HFT as the famous two player game, Prisoner's Dilemma. We explore the implementation of HFT as an instance of Prisoner's Dilemma on the (quasi) quantum cloud using the Eisert, Wilkens, and Lewenstein quantum mediated communication protocol, and how this implementation can not only increase transaction speed but also improve the lot of the players in HFT. Using cooperative game-theoretic reasoning, we also note that in the near future when the internet is properly quantum, players will be able to achieve Pareto-optimality in HFT as an instance of reinforced machine learning.

Belal Ehsan Baaquie

Do Ngoc Diep

Jinghui Wu, Wenjun Zhu, Yun Xu +2 more

This study presents an innovative approach for optimizing real-time energy market trading strategies by integrating Proximal Policy Optimization (PPO) with Quantum Annealing (QA). The primary objective is to enhance trading performance by leveraging the adaptive capabilities of PPO alongside the optimization power of QA. The methodology involves using PPO to develop a dynamic trading strategy that adapts to real-time market conditions. PPO’s reinforcement learning framework is employed to manage state representations, action spaces, and reward functions, thereby continuously refining the trading policy. The optimization of trading parameters is achieved through Quantum Annealing, which solves Quadratic Unconstrained Binary Optimization (QUBO) problems derived from the trading strategy formulation. Key findings from the study demonstrate significant improvements in trading outcomes. The integration of QA with PPO led to a 25% increase in total return, a 15% enhancement in Sharpe ratio, a 10% reduction in maximum drawdown, and a 20% decrease in transaction costs. These results highlight the effectiveness of combining quantum optimization techniques with reinforcement learning for superior trading strategy development. The significance of this study lies in its contribution to advancing real-time trading strategy optimization through the synergistic use of machine learning and quantum computing. This approach offers potential applications across various financial sectors and domains requiring sophisticated real-time decision-making and optimization. Future research is suggested to further explore the scalability and practical implementation of this integrated methodology in more complex and larger-scale optimization problems.

Martin Schaden

Axel Ciceri, Cottrell, Austin, Freeland, Joshua +13 more

The estimation of fill probabilities for trade orders represents a key ingredient in the optimization of algorithmic trading strategies. It is bound by the complex dynamics of financial markets with inherent uncertainties, and the limitations of models aiming to learn from multivariate financial time series that often exhibit stochastic properties with hidden temporal patterns. In this paper, we focus on algorithmic responses to trade inquiries in the corporate bond market and investigate fill probability estimation errors of common machine learning models when given real production-scale intraday trade event data, transformed by a quantum algorithm running on IBM Heron processors, as well as on noiseless quantum simulators for comparison. We introduce a framework to embed these quantum-generated data transforms as a decoupled offline component that can be selectively queried by models in low-latency institutional trade optimization settings. A trade execution backtesting method is employed to evaluate the fill prediction performance of these models in relation to their input data. We observe a relative gain of up to ~ 34% in out-of-sample test scores for those models with access to quantum hardware-transformed data over those using the original trading data or transforms by noiseless quantum simulation. These empirical results suggest that the inherent noise in current quantum hardware contributes to this effect and motivates further studies. Our work demonstrates the emerging potential of quantum computing as a complementary explorative tool in quantitative finance and encourages applied industry research towards practical applications in trading.