What is a round trip trading violation?

Round Trip Trading Violation: Definition and Implications

Round trip trading, also known as wash trading, is a violation of securities regulations that involves simultaneously buying and selling the same security in a short period, often within minutes or seconds. This practice is strictly prohibited by law as it can artificially inflate trading volume and manipulate market prices.

Impact on Fund Companies

Short-term fund trading, including round trip trading, is a concern for fund companies. Frequent buying and selling of a fund’s shares within a short time frame can disrupt the fund’s investment strategy and harm long-term investors. To discourage this behavior, many fund companies implement trading restrictions and impose fees on excessive trading.

Unintended Consequences of Excessive Trading Policies

While excessive trading policies aim to protect investors, they may also create unintended consequences. If trading restrictions are too stringent, they can inadvertently encourage round trip trading. Investors who are restricted from making frequent withdrawals may seek alternative methods to access their funds, such as repeatedly buying and selling shares of the same fund.

Balancing Benefits and Risks

Fund companies face a delicate balancing act in setting trading policies. They must consider the potential benefits of discouraging excessive trading while mitigating the risk of incentivizing illegal practices like round trip trading. A carefully crafted policy should:

• Discourage short-term trading without unfairly restricting legitimate investors
• Be easy to understand and enforce
• Promote transparency and prevent illegal activities
• Be regularly reviewed and updated to address changing market conditions

Consequences of Round Trip Trading Violation

Engaging in round trip trading is a violation of the law and can have serious consequences. Individuals and entities involved in this practice may face fines, sanctions, and even criminal charges. In addition, fund companies may take action to restrict or terminate the accounts of individuals suspected of round trip trading.

Conclusion

Round trip trading is a serious violation that can distort markets and harm investors. Fund companies have a responsibility to implement policies that discourage this practice while ensuring they do not unintentionally create incentives for illegal behavior. By carefully balancing the benefits and risks of trading restrictions, fund companies can strike an equilibrium between protecting long-term investors and allowing for legitimate market activities.