FINRA enters the quantum realm

As securities firms investigate potential uses for quantum computing, the U.S. Financial Industry Regulatory Authority Inc. (FINRA) launched a consultation on the possible regulatory implications of the technology.

The organization published a report Monday examining quantum computing, which utilizes new technology to dramatically enhance computing power, and its potential to disrupt the securities industry.

In the report, the SRO said industry firms are exploring the possible uses of the technology in trade execution, portfolio management and fraud detection.

“The technology may also allow firms to better understand and account for uncertainty related to market activity by allowing them to run simulations that would potentially be impossible to run on traditional computers,” FINRA said. “A risk assessment that may take days currently could be done in hours to near real-time with quantum computing.”

The technology could supercharge artificial intelligence (AI) applications too, it suggested.

At the same time, firms are also worrying about hackers using quantum computing to attack firms’ systems, particularly to defeat existing encryption methods.

“Quantum computers may eventually have the capacity to break certain encryption standards [that] broker-dealers and other members of the financial services industry currently use,” the report said.

Given its potential, the technology raises a number of regulatory considerations for the industry and policymakers alike, the report said, including issues surrounding cybersecurity, outsourcing, data governance and supervisory controls.

“The more complex the model and the application, the more vulnerable it may be to potential sources of error that could go undetected without the appropriate risk-management models and supervisory controls (including enhanced testing),” the report said.

Increasingly-powerful algorithms also pose growing threats to market stability and the industry too, the report suggested.

“Quantum computing may have a profound impact on the securities industry, whether for larger and more well-resourced firms seeking to leverage quantum advantage or for firms of all sizes preparing to defend against attacks on present-day cryptography,” the report said.

FINRA is seeking feedback on the paper, including input on potential areas for future regulatory guidance or rule changes to address the implications of quantum computing.

The deadline for feedback is March 15, 2024.

“We look forward to collaborating with the securities industry to understand the implications that quantum computing could have on the financial markets. From ways the technology could bolster the industry to the threats it potentially presents, it is important to collectively consider the implications of this technology,” said Haimera Workie, vice president and head of the Office of Financial Innovation at FINRA, in a release.

“This research and our ongoing work to better understand the impact of quantum computing on the securities industry will help FINRA to continue to carry out its mission of investor protection and market integrity as the technology evolves,” he added.