The Israeli government is investigating claims by U.S. researchers that some stock traders may have had prior knowledge of the Oct. 7 Hamas attack on Israel and used that information to make millions of dollars by short-selling Israeli companies.
In a draft paper released on Dec. 4, law professors Robert Jackson Jr. of New York University and Joshua Mitts of Columbia University said they identified a “sharp and unusual” spike in trading in “risky short-dated options” on Israeli companies in the days leading up to the deadly Hamas invasion of Israel.
Short-sellers bet against companies whose shares they expect to fall in price. They pay a fee to borrow shares in those companies and then sell them for the current market price, hoping to make a profit by buying them back for less before the shares have to be returned.
“Days before the attack, traders appeared to anticipate the events to come,” they wrote, noting that short interest in the MSCI Israel Exchange Traded Fund (EIS), which tracks the performance of a basket of Israeli securities, “suddenly and significantly spiked” on Oct. 2, five days before Hamas terrorists attacked Israel and reignited the Middle East war.
“And just before the attack, short selling of Israeli securities on the Tel Aviv Stock Exchange increased dramatically.”
To illustrate how unusual the bet against the Israeli market was, the New York professors pointed to the volume of short transactions in EIS units from 2009 to 2023, during which Israel experienced many crises—from the aftermath of the 2008 financial crisis to the 2014 Gaza conflict to the global COVID-19 pandemic to the more recent nationwide protest against Prime Minister Benjamin Netanyahu’s judicial reform proposal.
Throughout all 3,750 trading days in the 14-year period, the short volume on EIS on Oct. 2 was in the top 99 percent percentile, according to the paper.
“This indicates that it is extremely unlikely that the volume of short selling on October 2 occurred by random chance,” it reads.
For their 66-page paper, the professors used data from the Financial Industry Regulatory Authority, a Washington-based self-regulation and market surveillance agency. Upon examining the data, they also identified a similar attempt to short Israeli stocks this April, ahead of what was reportedly a Hamas plan to attack Israel on the Jewish holiday of Passover, which this year fell on April 5.
Specifically, according to the paper, short volume in EIS peaked on April 3 at levels very similar to those observed on Oct. 2 and had a much greater magnitude than every other day before April 3.
Similarly, the short ratio peaked at 94 percent on April 3, which was higher than every other day throughout the period from March 1 to April 3.
“Over that period, the average short ratio was 38.87 percent, so this ratio on April 3 was exceptionally high,” the authors wrote. “Taken together, this evidence strengthens the interpretation that the trading observed in October and April was related to the Hamas attack rather than random noise.”
In terms of profit, the authors said those behind the scheme might have generated millions of dollars from just one short transaction alone.
In one example documented in the paper, 4.43 million new shares in Leumi, the largest bank in Israel, were sold short between Sept. 14 and Oct. 5. In the immediate aftermath of the Hamas attack, Leumi’s share price dropped from a high of 3,185 agorot ($8.57) per share on Oct. 4 to a low of 2,451 agorot ($6.60) on Oct. 23, potentially allowing the trader to pocket a profit—or avoid a loss—of more than $8.7 million.
The authors also noted that they found no evidence of an overall increase in short selling in Israeli companies traded on U.S. exchanges. They discussed some potential explanations, including that some of these companies in the defense sector may have benefited from the attacks.
“Our evidence is consistent with informed traders anticipating and profiting from the Hamas attack,” they wrote. “[However,] we are unable to link particular market participants to the pre-attack developments we see in securities markets—to say nothing of the underlying sources of information that produced the trades.”
According to the paper, trading on advanced knowledge of a terrorist attack is, at least for now, “not meaningfully regulated by existing law.”
In the meantime, the law professors offered some advice for policymakers on whether and how to regulate “trading on terror,” including creating incentives to encourage traders to use their inside information to prevent tragedy rather than profit from it.
“Lawmakers could consider incentives for traders to report the information to authorities, replacing trading profits with different rewards,” they wrote. “While the design of such a mechanism is beyond our scope, policies of this kind are not without precedent.”
The Israel Securities Authority stated that it’s aware of the matter and is investigating the claims, Reuters reported.
