New York CNN –
Bets on the value of Israeli companies surged in the days leading up to the Oct. 7 Hamas attacks, suggesting that some traders may have had advance knowledge of the impending terror attack and profited from it, a new study says , which was released on Monday.
The preliminary research, which has not been peer-reviewed, comes from law professors at Columbia University and New York University and describes a “significant” and “unusual” spike five days before the attacks in short-selling in the most popular Israel-linked fund firms. Short selling is a way to bet against the value of a security.
These bets against the value of the MSCI Israel Exchange Traded Fund (ETF) in the days before the October 7 attack “far exceeded” short selling during the Covid-19 pandemic, the 2014 Israel-Gaza war and 2008 global financial crisis, the paper notes.
“Our results suggest that traders who were aware of the impending attacks benefited from these tragic events,” the authors write.
Yale Law School professor Jonathan Macey told CNN the paper was “shocking.”
“The evidence that informed traders profited from anticipating the October 7 terrorist attack is compelling,” he said. “Regulators appear to lack the ability to identify the companies responsible for this trading, which is unfortunate.”
On October 7, at least 1,200 people were killed in Israel when more than 1,500 Hamas militants attacked Israel. Others are still being held hostage by Hamas.
The article, titled “Trading on Terror?”, was written by former SEC Commissioner Robert Jackson Jr., who is currently a professor at NYU and a law professor at Columbia University Professor Joshua Mitts.
The investigation found that on October 2, just five days before the Hamas attack, “nearly 100% of the over-the-counter trading volume in the MSCI Israel ETF… consisted of short selling.”
“Days before the attack, traders appeared to have anticipated the coming events,” the professors wrote.
Mitts, one of the paper’s authors, told CNN in a telephone interview that he thought it was “highly likely” that more trading had occurred behind the scenes due to the limited nature of public trading data. “We’re only seeing the tip of the iceberg,” Mitts said. “There is much more that we cannot see but that should be kept in mind by regulators.”
Mitts added that he and Jackson, his co-author, were “very confident” that the trading activity was “extraordinary” and “extraordinary” and “not the product of ordinary trading” compared to more than a decade of trading.
The authors do not currently know where the parties conducting business are located and whether the traders had ties to specific financial companies, government entities or terrorist organizations. And they urge caution before drawing such conclusions.
“It’s very speculative to link it to Hamas, and we’re not suggesting that,” Mitts said, adding there are a variety of possibilities, including the possibility that someone “overheard something” and acted accordingly .
The U.S. Securities and Exchange Commission responded that it “does not comment on the existence or non-existence of a possible investigation.”
The Israel Securities Authority did not respond to CNN’s request for comment. The Israeli regulator told Portal: “The matter is known to the authority and is being investigated by all relevant parties.”
Bill Bagley, a spokesman for the Financial Industry Regulatory Authority (FINRA), told CNN that the regulator does not comment on whether or not it is conducting an investigation.
The professors stressed that their findings were “preliminary” and that they were unable to link specific traders to these transactions, let alone determine what the underlying sources of information were.
However, the researchers note that U.S. regulators, including the SEC and the Financial Industry Regulatory Authority (FINRA), have access to nonpublic data that could help investigators understand why and how markets moved ahead of March 7 October behaved.
In the days leading up to the attack, bets on Israeli securities traded on the Tel Aviv Stock Exchange “increased dramatically,” the paper said.
For example, researchers found that between September 14 and October 5, 4.4 million new shares of Bank Leumi, one of Israel’s largest banks, were sold short. Bank Leumi share prices fell 23% between October 4th and 23rd.
However, no corresponding increase in short selling of Israeli companies trading on US exchanges has been found. However, the authors suggest that this may be because some Israeli defense companies benefited from higher demand after the attacks and some had a large international presence.
The investigation found an increase in short-term options contracts on stocks of Israeli companies traded on US exchanges. This was related to multiple options block trades, the professors said, “suggesting that a small number of actors may be behind this options trading.”
The paper concluded that the “significant” increase in short selling on the Tel Aviv Stock Exchange before the October 7 attack did not occur before the market collapse following the passage of judicial reform in July 2023, which sparked nationwide protests in Israel.
“Overall, our evidence is consistent with the statement that informed traders anticipated and profited 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 trading “might be informed – based on an assessment of the likelihood of a future event, such as a terrorist attack – but some may simply reflect algorithmic or other trading activity that reflects: and magnifies price changes that occur without specific knowledge of the future event.”
In any case, Whitehead argued that this is an area that requires “close scrutiny” to anticipate future events and “prevent terrorists and others with inside information from profiting from terrorist activities.”