is there a penalty for them or is it permissible?
if they are proven to do this. what if their rank is lowered too?
Yes, that is abusing merit the receiver and sender merit will be punished once they are caught someone and proven they are abusing both accounts were got negative trust.
...
I'm wonder if getting red trust would stop such merit trader from continuing this activity?
For example this guy: LINK has already got -32 trust and he's still trading without care.
Maybe exept red trust it could be possible to block his sMerits for some period of time or delete them for good. Such guy could still get Merit for his contribution but not sMerit until his punishement period will pass. This would stop him trading for good.
I'm sure that such solution could be developed.