The rise of proprietary trading (prop trading) in Russia has caught the attention of the country’s central bank, but not for the reasons traders might hope.

While prop trading firms have gained traction both domestically and internationally, the Bank of Russia now views their operations as a potential threat to market stability, raising concerns about manipulation, according to the central bank’s 2024 annual report to State Duma.

Without clear regulations governing their activities, these firms operate in a legal gray area—one the regulator may soon seek to address. In the report, the Bank of Russia highlighted its efforts to combat unfair trading practices.

Russia’s Central Bank Flags Market Risks

‘The first months of 2025 suggest that the economy is gradually restoring this balance. Price growth is decelerating, while the economy is still growing, although at a more moderate pace,” Elvira Nabiullina, The Governor of the Central Bank of Russia, said.

“In other words, production capacities continue to expand, while the increase in demand is becoming more balanced, without provoking a further acceleration of inflation and depreciation of the ruble.”

It identified prop trading as a growing concern, not due to consumer protection issues, but because of its potential impact on market integrity. According to the report, prop trading firms account for a significant share of securities and derivatives trading.

The regulator believes their reliance on repetitive trading strategies, high-frequency transactions, and large trade volumes could distort organized market parameters.

It emphasized that these firms' influence extends beyond individual transactions, affecting market trends as a whole. One of the core issues raised by the regulator is the lack of legal provisions specifically governing prop trading firms.

First Findings of Market Manipulation

The current legislation does not impose internal control requirements on these firms, creating regulatory blind spots that could facilitate unfair practices.

The central bank’s concerns are not just theoretical. Following inspections, authorities uncovered instances of market manipulation involving futures contracts and shares traded on organized exchanges. While the regulator has taken action in these cases, the broader structural risks remain unaddressed.

“These companies occupy a significant share in the turnover of trading in securities and derivatives market instruments. Their activities influence the formation of the parameters of organized trading due to the use of template trading strategies,” the report says. "The multiplicity of traders involved in trading, the high frequency of transactions in certain periods of time and the significant volumes of transactions carried out on the market."

In response, the Bank of Russia has urged prop trading firms to strengthen internal controls over individuals managing their operations, including those developing trading strategies. The regulator also wants these measures, along with proper training, could help prevent violations of financial market laws.

Source: Finance Magnates