What it means
Every completed trade has two sides: one to get in and one to get out. Together these make a round trip.
Day traders, for example, may complete several round trips in a single session, and the total cost depends on all of them. The cost of a round trip is more than twice the commission.
There is the broker's fee on each side, the bid-offer spread (the gap between the price at which you can buy and the price at which you can sell), and sometimes taxes or exchange fees. A position needs to move enough to cover these costs before it makes any profit.
Regulators and brokers also count round trips. In some markets, accounts that complete a certain number of day trades in a short period are classed as pattern day traders, which brings extra capital requirements.
Certain mutual funds also charge a fee or limit access to investors who buy and sell the same fund within a short time. A second, more worrying meaning is round-tripping in accounting and finance.
Two companies may sell the same goods to each other, or lend the same money in a circle, to inflate revenue or trading volume without any real economic substance. This is a red flag for auditors and regulators because it can mislead investors.
Finance teams should therefore keep both meanings in mind. For trading activity, the key point is to measure the total cost of a cycle and to check whether the strategy still works after those costs.
For commercial transactions, the key is to make sure that each deal has a genuine business reason. The nuance with trading is that frequent round trips raise costs and often taxes, because short-term gains can be taxed at higher rates than long-term gains.
A strategy that looks good before costs may be poor after them.
In practice
Real-world examples.
Example
A day trader buys 500 shares of a technology company in the morning and sells them in the afternoon. The round trip earns a gross gain of $250, but commissions and spread cost $60. The net profit is $190.
Example
An investor puts money into a mutual fund and takes it out three weeks later. The fund charges a short-term trading fee of 1% on the $20,000 withdrawn, which is $200. The investor learns that the round trip cost much more than the small gain she made.
Example
Two companies agree that one will sell the other $3,000,000 of software and the other will sell back $3,000,000 of services at the same time. Neither business changes, but both report higher revenue. An auditor questions the arrangement because there is no clear commercial purpose.
Formula
Calculation
Net result of a round trip = (sale price - purchase price) x quantity - total costs
Suppose an investor buys 1,000 shares at $20.00 and sells them at $20.60. The gross gain is (20.60 - 20.00) x 1,000 = $600. Commission is $15 on the purchase and $15 on the sale, a total of $30. Net result = 600 - 30 = $570. If the spread cost another $0.02 per share on each side, that would reduce the result by 0.04 x 1,000 = $40, leaving $530.Case study
Seen in the real world.
Quill Capital is an illustrative, fictional trading firm that tested a strategy of buying small price dips and selling after a quick rebound. Before costs, each round trip made an average of $85 on a position of 1,000 shares.
The operations manager added up the costs. Commissions were $10 per side, and the spread cost about $20 each way, so the cost per round trip was (10 + 20) x 2 = $60. The net average profit was therefore 85 - 60 = $25 per round trip.
After tax and the cost of the traders' time, the strategy broke even. The illustrative lesson is that a trading idea has to be judged on the whole round trip, not on the headline gain.
Watch out
Common mistakes.
- Counting only the commission on the first trade and ignoring the cost of getting out.
- Forgetting that frequent round trips can trigger extra rules, fees or higher tax on short-term gains.
- Treating circular sales between related companies as genuine revenue.
Questions
People also ask.
What counts as one round trip?
A purchase and the matching sale of the same security, or a sale and the matching repurchase, make one round trip.
Why do funds penalise round trips?
Quick in-and-out trading can force a fund to hold more cash or sell assets, which hurts long-term investors.
Is round tripping illegal?
Genuine trading round trips are legal, but circular deals made to inflate figures can breach accounting rules and the law.
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