Climb on Board to Understand Round-Trip Trading

by Investing School on April 25, 2012

When someone plans on some round-trip trading there is only one destination in mind: the inflation of transaction volumes. By constantly buying and selling a particular asset, stock, commodity or security, round-trip trading creates the illusion of many shares changing hands in a short amount of time. When an asset is traded frequently it makes it appear as if it is highly desirable or creating a lot of interest. Sometimes several companies agree to purchase each other’s shares and then purchase back their own assets at the same price. A form of market manipulation, round trip trading has occurred in both the telecommunications and energy industry.

The reason round-trip trading helps the owners of the traded shares is that the practice causes a misrepresentation of the total number of sales and purchases which occurred during a specific day. While the trading causes volume and revenue numbers to be inflated, there is little actual difference in profits. The classic case cited would be the Enron scandal. Revenues increased, but, there was no actual increase in the income.

Even people engage in round-trip trading. An individual who purchases the same stock more than 3 times in one day, and then sells it on the same day, is said to be involved in round-trip trading. Many investment firms have built in protocols to prevent such buying/selling patterns; some will restrict sales for up to 90 days. The risk to both company and individual is high and is not recommended. Frequently a certain level of equity must be maintained in the investor’s accounts to ward off any problems.

Promote or Save This Article

If you like this article, please consider bookmarking or helping us promote it!

Print It | Email This | | Stumble it! | Reddit |

Related Posts

{ 0 comments… add one now }

Leave a Comment

Previous post:

Next post: