Bets against the value of Israeli companies spiked in the days before the October 7th Hamas attacks, suggesting some traders may have had advance knowledge of the looming terror attack and profited off it, according to new research released Monday.
The preliminary research, which hasn’t been peer reviewed, is from law professors at Columbia University and New York University and details a “significant” and “unusual” spike five days before the attacks in short selling in the most popular fund linked to Israeli companies. Short selling is a way to bet against the value of a security.
Those bets against the value of the MSCI Israel Exchange Traded Fund (ETF) in the days before the October 7 attack “far exceeded” the short selling activity that took place during the Covid-19 pandemic, the 2014 Israel-Gaza war and the 2008 global financial crisis, the paper finds.
“Our findings suggest that traders informed about the coming attacks profited from these tragic events,” the authors wrote.
A ‘shocking’ paper
Jonathan Macey, a professor at Yale Law School, told CNN the paper is “shocking.”
“The evidence that informed traders profited by anticipating the terrorist attack of October 7 is strong,” he said. “Regulators appear to lack the ability to discover the entities responsible for this trading, which is unfortunate.”
At least 1,200 people were killed in Israel on October 7 when more than 1,500 Hamas fighters attacked Israel. Others are still held hostage by Hamas.
The paper, titled “Trading on Terror?”, was written by former SEC commissioner Robert Jackson Jr., who is currently a professor at NYU, and Columbia law professor Joshua Mitts.
The research found that on October 2, just five days before the Hamas attack, “nearly 100% of the off-exchange trading volume in the MSCI Israel ETF … consisted of short selling.”
“Days before the attack, traders appeared to anticipate the events to come,” the professors wrote.
Mitts, one of the paper’s authors, told CNN in a phone interview that due to the limited nature of public trading data, he believes it’s “highly likely” there is more trading that went on behind the scenes. “We are only seeing the tip of the iceberg,” Mitts said. “There is a lot more out there that we can’t pick up on but that regulators should be looking at.”
Mitts added that he and Jackson, his co-author, are “very confident” that the trading activity is “exceptional” and “extraordinary” when compared with over a decade of trading and “not the product of ordinary trading.”
The authors at present don’t know the location of parties making trades and whether the traders were connected to any particular financial firms, government entities or terrorist organizations. And they urge caution before drawing such conclusions.
“Linking it back to Hamas is very speculative and we’re not suggesting this,” Mitts said, adding there are a wide range of possibilities including the potential that someone “overheard something” and acted on it.
The US Securities and Exchange Commission responded that it “does not comment on the existence or nonexistence of a possible investigation.”
The Israeli Securities Authority did not respond to CNN’s request for comment. The Israeli regulator told Reuters: “The matter is known to the authority and is under investigation by all the relevant parties.”
Bill Bagley, a spokesperson for the Financial Industry Regulatory Authority (FINRA), told CNN the regulator does not comment on whether or not it is conducting an investigation.
The professors stressed that their findings are “preliminary,” and they are unable to link specific traders to these transactions, let alone determine what their underlying sources of information were.
However, the researchers note that US regulators, including at the SEC and the Financial Industry Regulatory Authority (FINRA), have access to nonpublic data that could help investigators understand why and how markets acted before October 7.
In the days before the attack, bets against Israeli securities traded on the Tel Aviv Stock Exchange “increased dramatically,” the paper said.
For example, the researchers found that between September 14 and October 5, there were 4.4 million new shares sold short in Bank Leumi, one of Israel’s largest banks. Bank Leumi’s share prices tumbled 23% between October 4 and October 23.
However, there was no corresponding increase found in short selling in Israeli companies traded on US exchanges, though the authors suggest this could be because some Israeli defense companies stood to benefit from higher demand following the attacks and some have large international presence.
The research did find an increase in short-dated options contracts on shares of Israeli firms traded on US exchange. This was linked to several block trades in options, the professors said, “suggesting that a small number of actors may have been behind this options trading.”
The paper found that the “substantial” increase in short selling on the Tel Aviv Stock Exchange prior to the October 7 attack was not present before the market drop that occurred following the judicial reform enactment in July 2023 that set off nationwide protests in Israel.
“Taken together, our evidence is consistent with informed traders anticipating and profiting from the Hamas attack,” the authors wrote.
Charles Whitehead, a professor at Cornell Law School, called the study “interesting but preliminary.”
In an email to CNN, Whitehead noted that some of the trading may be “informed –- based on an assessment of the likelihood of a future event, like a terrorist attack –- but some may simply reflect algorithmic or other trading activity that mirrors, and magnifies, changes in price that are taking place without any particular knowledge of the future event.”
Either way, Whitehead argued this is an area that deserves “close scrutiny” as a way to help anticipate future events and “cut off the ability of terrorists and others, with inside information, from profiting on terrorist activity.”