Back-and-forth trading involves buying and selling the same security or asset on the same day, and is regulated due to its risks and potential for market manipulation. Day traders and companies engage in this practice, but regulations aim to discourage it.
Round-trip trading, in terms of individual investors, refers to the practice of buying and selling the same security on the same trading day. Since 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 company terms, back-and-forth trading occurs when one company sells an asset to another company and then buys the same asset from the second company for the same price. This practice increases trading volume, which can increase share prices in the process, and can also be used to artificially increase the total revenue 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 regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States, have instituted rules to try to discourage these practices. One particular practice that has drawn the attention of market regulators is the technique known as back-and-forth trading, which can mislead 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 who are most likely to use back-and-forth trading. Trading back and forth requires buying a security and then selling it on the same day. Because there are serious risks in doing these kinds of trades on a consistent basis, the SEC requires traders to have a significant minimum amount in their accounts to trade without limits back and forth.
Perhaps even more detrimental to the overall economic picture is when companies engage in back-and-forth trading. When conducted at the corporate level, a back-and-forth exchange involves two companies clandestinely agreeing to sell an asset. After a short time, the company that bought the asset simply resells it to the company that originally owned it.
There are two ways that corporate back-and-forth trading is deceptive. First, trades, if done often enough and involve stocks or bonds, can increase trading volume. Investors often track volume as a way to gauge interest in a company, so improved volume often leads to better stock prices. The other way that a corporate back-and-forth trade is deceptive is that it increases the total revenue of the companies involved. Although there is no actual profit or loss involved, the higher total income can also attract unsuspecting investors.
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