Question

2. What are banks doing to their loan portfolio when they choose to amortize loans instead of use a regular annuity payment method?

3. What is the looming concern regarding high frequency trading?

Answer 1

Instead of using a regular annuity payment method, Banks, after choosing to amortize loans of all the available loan portfolios, create multiple asset groups or classes of the loan portfolios. Loan portfolios are mostly aggregated to create all new asset class to issue new loans or securities either backed by mortgaged asset or a security.
Special Purpose Vehicle (SPV) is the most common example of loan portfolios aggregation to issue new securities on discounted basis. Similarly, the expected NPAs are also traded in the market to hedge against the default of the loans underlying. Banks appoint an underwriter to assure the underlying loans are covered for the risks of default. A different product or service line is created from the loan portfolios and traded for the annuity payments from the borrowing parties, to be paid to the investors on regular basis investing in the sub-prime loans as a premium or coupons upon their investments.
High frequency trading looming concern involves the following:
-   One of the biggest concerns of High Frequency Trading using Algorithms is the one it poses to the financial system. Because of the strong inter-linkages between financial markets, such as those in the U.S., algorithms operating across markets can transmit shocks rapidly from one market to the next, thus amplifying systemic risk.
-   High Frequency Trading may result in "spoofing," which involves placing large volumes of fake orders in an asset or derivative that get canceled before they are filled. When such large-scale bogus orders show up in the order book, they give other traders the impression that there's greater buying or selling interest than there is in reality, which could influence their own trading decisions.
-   High Frequency Trading algorithms are merely exaggerating sentiments by moving large sums at instantaneous speeds - then they are not facilitating price discovery but in fact preventing that goal from being achieved.
-   Systemic risk is amplified and an error with an algorithm, at a relatively small firm, could cascade throughout the market.
-   Technology failures due to High Frequency Trading, exceptional or unanticipated market conditions could lead to a firm carrying significantly more risk overnight than it had intended, and without timely oversight.
-   Internal controls may not have kept pace with market complexity. More specifically, the note says, “malfunctions and outages at financial institutions and critical entities such as exchanges are not new, but their potential impact can be amplified.