Round-Trip Trading

What is 'Round-Trip Trading'

Round-trip trading attempts to inflate transaction volumes through the continuous and frequent purchase and sale of a particular security. The term can also be used to refer to the practice of a business selling an unused asset to another company while agreeing to buy back the same asset for about the same price in the future. Fraudulent round-trip trades were prevalent in the energy and telecom industries. Also known as wash trades.

BREAKING DOWN 'Round-Trip Trading'

Round-trip trading is a deceptive method that individuals or companies use to increase income and/or show the appearance of trading activity.

The term may also simply refer to wash trades where an individual or institution may buy and sell a security for roughly the same price in a short period of time for legal reasons. Pattern day traders may conduct these types of trades as a course of business since they are executing many transactions that they close in the same day. These traders must maintain a minimum of $25,000 in account equity to make these kinds of trades.

Another form of round-trip trading is a legal swap agreement, where financial institutions will exchange an asset for cash with an agreement to repurchase it in the future. In these cases, the financial institution is looking for temporary liquidity and the agreements may be disclosed. These practices are commonplace in the derivatives markets and among commercial banks.

Examples of Round-Trip Trading

Dynergy Inc. paid a $3 million penalty in 2002 when it allegedly overstated its energy trading activity by conducting round-trip trades. These trades were pre-arranged buy-sell trades of energy with the same counterparty, at the same price and volume, and over the same term, resulting in neither profit nor loss to either transacting party. The high level of trading activity misled investors about the true health of its DynergyDirect platform.

In some cases, penny stock promoters may also use round-trip trades to generate artificial volume in a thinly-traded stock. The promoter may then tout the increased volume as evidence that the market is interested in the stock in an attempt to lure other traders to buy. These activities are illegal and many stock promoters have been fined and/or jailed by the SEC.

Of course, Enron is perhaps the most popular example of round-trip trading after it engaged in a pattern of these trades that enabled it to increase revenues (and expenses) without changing its net income. The fraud eventually came out and the company’s high-profile collapse forever changed the financial and energy sectors’ regulations.

The Bottom Line

Round-trip trading usually refers to the deceptive practice of buying and selling a security multiple times without making or losing money in an attempt to artificially generate income or volume. However, the term may also apply to legal trades made by pattern day traders or swap agreements made by financial institutions to generate temporary liquidity.