Real-time Trading System based on Selections of Potentially Profitable, Uncorrelated, and Balanced Stocks by NP-hard Combinatorial Optimization

TL;DR

This paper presents a real-time stock trading system that uses an Ising machine based on quantum-inspired algorithms to solve NP-hard portfolio optimization problems, selecting uncorrelated and balanced stocks to improve trading performance.

Contribution

It introduces a novel FPGA-based trading system utilizing an Ising machine with simulated bifurcation for high-speed NP-hard portfolio optimization in real-time trading.

Findings

Successfully implemented on Tokyo Stock Exchange with 128 stocks

Achieved response latency of 164 microseconds

Demonstrated improved Sharpe ratio through optimized stock selection

Abstract

Financial portfolio construction problems are often formulated as quadratic and discrete (combinatorial) optimization that belong to the nondeterministic polynomial time (NP)-hard class in computational complexity theory. Ising machines are hardware devices that work in quantum-mechanical/quantum-inspired principles for quickly solving NP-hard optimization problems, which potentially enable making trading decisions based on NP-hard optimization in the time constraints for high-speed trading strategies. Here we report a real-time stock trading system that determines long(buying)/short(selling) positions through NP-hard portfolio optimization for improving the Sharpe ratio using an embedded Ising machine based on a quantum-inspired algorithm called simulated bifurcation. The Ising machine selects a balanced (delta-neutral) group of stocks from an $N$-stock universe according to an objective function involving maximizing instantaneous expected returns defined as deviations from volume-weighted average prices and minimizing the summation of statistical correlation factors (for diversification). It has been demonstrated in the Tokyo Stock Exchange that the trading strategy based on NP-hard portfolio optimization for $N$=128 is executable with the FPGA (field-programmable gate array)-based trading system with a response latency of 164 $\mu$s.