Google wont know its a 3-way link exchange. It will only be viewed as 1-way links and thats quite good. I have been doing 3-way links for a long time now and its really beneficial.
It's ok but be aware that search engines can and will figure out the link sceme pretty quickly. That being said, it's still better than nothing so you might as well do it... If you're wondering how a search engine can figure it out... its easy. When you have a database of 8+ Billion pages (and domain WHOIS info) you can easily determine who owns what sites and the type of link exchanges going on. Theoretically you could do this and NEVER be discovered, but all it takes is ONE sloppy link partner to ruin it. Imagine you link to someone on 1 or more of his sites... but he interlinks most/all of his sites... this means that by analyzing his sites and the sites they link to you can get a good idea of who is trading or buying links. Think about it, Google, Yahoo!, MSN have the world's brightest engineers, free access to the same forums as us and loads of database info and algos to figure out our tricks... granted they're slow at times but eventually they'll get the job done. If you're going to trade links with a site that is genuinely high quality and interesting to your readers, you're better off doing a classic link exchange and taking advantage of on another's reputation and traffic. my2c. Pete.
I know that it may be just a possibility that Google would find a link scheme and penalize sites. But then many link exchange service sites exist out there, even with decent pagerank and SERPs. Shouldn't Google penalize such sites that encourage millions to do link exchange?
I don't think they will penalize you... Just know that those links won't be worth anything more than those from a classic link exchange. I myself have used link exchange services like CO-OP and Link-Vault with some good results... and not so good results. I guess it just depends on your luck. For example, by using these services I've been able to elevate new sites to PR4 in one update... fantastic result. However, those same sites were slowly being de-indexed as a result of linking out to so many random sites, probably because they were also recognized as members of the link exchange system. I can say with certainty that it was a direct result of the link trading because after removing the links my sites were slowly (very slowly) re-included to Google's main search (individual datacenters never de-indexed me)... no other changes were made. My suggestion is to setup a link partner page if you plan on trading random links and if you decide to use a link exchange script keep the number of links to a bare minimum. If you plan on linking to good partners, do it with a good, visible link and insist on the same in return. It will benefit your VISITORS and that will ultimately benefit YOU. PS: If you really want to boost your PR, go buy a handful of high PR links (PR6+)... this WILL make a difference. Pete.