Round-trip trading, in terms of individual investors, refers to the practice of buying and selling the same security in the same trading day. Since this is a risky practice, many markets have regulations in place that prevent this from taking place unless the investor has a significant amount of money in his or her trading account. In terms of companies, round-trip trading takes place when a company sells an asset to another company and then buys the same asset back from the second company for the same price. This practice inflates trading volume, which can boost stock prices in the process, and also can be used to artificially raise revenue totals for the companies involved.
Unfortunately, there are unscrupulous individuals and institutions that attempt to manipulate markets and investors in their favor. As a result, market regulatory bodies, like the Securities and Exchange Commission (SEC) in the United States, have instituted rules to try to dissuade these practices. One particular practice that has drawn the scrutiny of market regulators is the technique known as round-trip trading, which can deceive investors if left unchecked.
Day-traders, who are investors who make a significant number of market transactions in a single day in an attempt to time price movements, are the people most likely to use round-trip trading. Making a round-trip trade requires buying a security and then selling it in the same day. Since there are severe risks involved in making these kinds of trades on a constant basis, the SEC requires traders to have a significant minimum amount in their accounts to round-trip trade without limits.
Perhaps even more damaging to the overall economic picture is when companies indulge in round-trip trading. When it takes place on a corporate level, a round-trip trade involves two companies clandestinely agreeing to the sale of an asset. After a short time, the company that bought the asset simply resells it to the company that owned it originally.
There are two ways in which corporate round-trip trading is deceptive. First, the trades, if they are performed often enough and involve stocks or bonds, can boost trading volume. Investors often track volume as a way to measure interest in a company, so improved volume often leads to improved stock prices. The other way that a corporate round-trip trade is misleading is that it increases revenue totals for the companies involved. Even though there is no actual loss or gain involved, the higher revenue totals also can entice unsuspecting investors.
