Back in 1995 I wrote a humourous article looking at the links between Quantum Physics and Finance. Little did I know how close I was to the truth!
In this year , 1998, I read an article looking at the work of a professional university physicist who had been applying the same mathematical tools that are used in quantum mechanics to the analysis of financial markets.
Intrigued, and as he was in the UK, I arranged to meet him for lunch, and asked him about what he was doing.
While I do not pretend to follow the math, I became convinced that he knew what he was on about, and that a suitably educated peer would be able to follow the logic, reasoning and mathematical detail.
In short he was suggesting that the current systems used in financial markets ( Black Scholes et al) can be derived from a broader model based on the mathematical tools used in quantum physics.
IE that the current models were simple solutions that worked in certain parameters, but that they fail when the market parameters are outside those assumed in the equations ( just as Newton's laws are valid for practical purposes so long as masses and velocities are of an everyday nature, but you need Einstein's Relativity Theory to deal with very extreme cases).
Everyone knows this to be the case - the markets (esp forex and equity option ones) frequently operate outside the conditions in which Black Scholes et al work. Traders therefore use various systems to try to deal with these markets, but these systems are, in the view of the physicist, little more than empiricism and guesswork, and while they have their uses they would be no match for a trader who actually had a model that correctly priced instruments while others guesstimated.
He thinks that his work will result in these accurate models being built, and that the first companies to do so will make a lot of money trading with them against their ill-informed rivals.
To get from here ( theoretical proofs backed up by a paper test on back data for one particular market) to practical trading tools will require investment.
If you are in the industry and are interested in pursuing this then drop me a line and if I think that I should do so I will pass your details to him. Note - I will need evidence that you are in position to fund the research, and / or have the technical background required to understand it.
Questions that you may wish to ask.
1) Will it work? He is confident that in fast moving markets , esp forex, index contracts and share option markets it will work. He is also aware that it will have little utility in some markets. As to which ones will best suit it, that will in part depend on the next phase of research and his developing a better understanding about issues such as transaction costs in each market.
2) Can he convince his peer group that he should be taken seriously?
I think so - He is a professional academic with an established UK University. If he had lunch with a mathematician of your choice who understood both his area of mathematics, and financial services I suspect that your man would say that he had something worth pursuing.
Technical scientific papers are available. Have your people read them.
3) How long will it take, and how much will it cost?
He expects that to produce a model for the first market will take 6-12 months, and that additional markets will take 3-6 months each ( due to their learning experience on the first one).
To make it work will require a team of highly qualified professionals from various disciplines. He has people in mind for the key roles.
It will require the use of workstations and PC networks.
The salary and hardware bill would probably be in the region of £500-£750K.
4) When we know that works is there any additional cost to bring to real time?
No. It will run in real time on work stations. There is no massive additional computing capacity needed to run live when shown to work in tests.