Round-trip trading, in terms of individual investors, refers to the practice of buying and selling the same security on the same trading day.
Round-trip trading, in terms of individual investors, refers to the practice of buying and selling the same security on the same trading day. As this is a risky practice, many markets have regulations in place that prevent this from happening unless the investor has a significant amount of money in their trading account. In terms of companies, back-and-forth trading occurs when one 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 drive up stock prices in the process, and can also be used to artificially increase the total revenues of the companies involved.
Unfortunately, there are unscrupulous individuals and institutions that try to manipulate the markets and investors in their favor. As a result, market regulators such as the US Securities and Exchange Commission (SEC) have instituted rules to try to deter such practices. One particular practice that has drawn scrutiny from market regulators is the technique known as back-and-forth trading, which can mislead investors if left unchecked.
Day-traders, who are investors who carry out a significant number of market transactions in a single day in an attempt to time price movements, are the people most likely to use back and forth trading. To do a round-trip, you need to buy a security and sell it on the same day. Since there are serious risks involved in making these types of trades on an ongoing basis, the SEC requires traders to have a significant minimum amount in their accounts for unlimited round-trip trading.
Perhaps even more damaging to the overall economic picture is when companies indulge in round-trip trade. When it takes place on a corporate level, a back-and-forth negotiation involves two companies clandestinely agreeing to the sale of an asset. After a short period of time, the company that bought the asset simply resells it to the company that originally owned it.
There are two ways corporate round-trip negotiations are misleading. Firstly, trades, if performed frequently enough and involve stocks or bonds, can increase the volume of trades. Investors often track volume as a way of measuring interest in a company, so higher volume often leads to better stock prices. The other way a corporate round-trip negotiation is misleading is because it increases the revenue totals of the companies involved. Even if there is no real gain or loss involved, higher revenue totals can also attract unsuspecting investors.