Hamas likely profited from Israel stock markets over short selling ahead of October terror attacks: US-based study

The Hamas terror group may have gained substantial profits from Israel stock markets ahead of the deadly October 7 terrorist attack as some traders may have had prior knowledge of the looming massacre and used it to short sell Israeli companies. A new study conducted by US-based researchers titled ‘Trading on Terror?’ found that bets placed (in short selling) against Israeli companies spiked significantly five days ahead of the Hamas attack.

The research study authored by law professors Robert Jackson Jr from New York University and Joshua Mitts of Columbia University, looked at the Israel Exchange-Traded Fund (ETF), a common way for people to make investments in Israel, which on any given day has around 2,000 shares shorted. On October 2, that number shot up to over 227,000 shares.

Also Read: Israel-Hamas war: How AI helps Israel army select bombing targets in Gaza

Short selling is a way to bet against the value of a security. It is a trading strategy aimed at making a profit off an asset that is expected to drop in price. The seller ‘borrows’ a security and sells it on the open market with the goal of buying it back later at a lower price and pocketing the difference.

The report also touches on the use of cryptocurrency by pro-Palestinian terrorist groups, including Hamas, for fundraising. Between August 2021 and June 2023, Hamas, Palestinian Islamic Jihad, and Hezbollah collectively received over $134 million in cryptocurrency, with Hamas alone receiving about $41 million during this period.

High short selling volume, suspicious stock trading activities: Check key findings of US-based researchers

-Firstly, the researchers used data from the Financial Industry Regulatory Authority (FINRA) to document the significant spike in short selling in the MSCI Israel ETF, days before the attack on October 7 - which has so far claimed the lives of over 1,200 people.

‘’…This increase in short selling is economically and statistically unusual. Nearly 100 per cent of the off-exchange trading volume in the MSCI Israel ETF on October 2 reported to FINRA consisted of short selling. We also document that the fraction of shares of this ETF lent to short sellers increased immediately before the attack,'' said the researchers in the study.

The professors referred to patterns in early April when it was reported that Hamas was initially planning its attack on Israel. "Short volume in EIS (the MSCI Israel ETF) peaked on April 3 at levels very similar to those observed on October 2, and was far higher by an order of magnitude than other days prior to April 3," they said.

Also Read: Israel-Hamas war Day 60: Israeli forces widen ground offensive in south Gaza; UN renews call for ceasefire

-Secondly, the researchers said because Israeli companies trade both on US exchanges and on the Tel Aviv Stock Exchange, they examined trading on each venue separately. On both venues, they documented an increase in short selling in several specific Israeli companies, although the aggregate effects vary depending on the venue.

We document a substantial overall increase in short interest in the Tel Aviv Stock Exchange, which peaks just before the attack on October 7—an increase that was not present before the market decline following the enactment of the judicial reform on July 24, 2023.

The study found that for Israel's largest bank, Leumi, 4.43 million new shares sold short over the September 14 to October 5 period yielded profits of 3.2 billion shekels ($862 million) on that additional short-selling.

“Although we see no aggregate increase in shorting of Israeli companies on US exchanges, we do identify a sharp and unusual increase, just before the attacks, in trading in risky short-dated options on these companies expiring just after the attacks,” said the researchers in the study.

-Thirdly, they also studied trading in short-dated options contracts on the shares of Israeli firms traded on US exchanges. After examining trading in options expiring on October 13, immediately after the attacks, the researchers found that open interest in these options, compared to options expiring later in the year, increased substantially immediately before the attacks.

‘’While we cannot say what the source of this unusual short selling was, the evidence we present is consistent with substantial block trades that occurred on October 2 rather than ordinary market-making activity,'' they added.

The US-based researchers also ran a number of comparisons over the past 13 years to see whether the same thing had happened before other major moments of instability in Israel, like the 2014 Israel-Gaza war, the COVID-19 pandemic, or the judicial reform initiative that led millions of Israelis to take to the streets in protest.

Also Read: Israel had 40-page document warning of 7 October Hamas attack. They brushed it off...

When considering the short ratio, October 2 ranks at position 15, or above the 99.5 per cent-quantile in rank-order. This indicated that it is extremely unlikely that the volume of short selling on October 2 occurred by random chance. Moreover, it also indicated that the short selling that day far exceeded the short selling that occurred during numerous other periods of crisis, including the recession following the financial crisis, the 2014 Gaza war, and the pandemic.

What next? Israel authorities investigate US-based study

Israeli authorities are investigating claims by the US researchers that some investors may have known in advance of a Hamas plan to attack Israel, according to a report by news agency Reuters.

In response, the Tel Aviv Stock Exchange referred Reuters to the Israel Securities Authority, which said: "The matter is known to the authority and is under investigation by all the relevant parties,'' according to the report.

Israel-Hamas War Day 60

Israeli troops and tanks have pressed their ground campaign against Hamas militants in the south of the Gaza Strip after having largely gained control of the now-devastated north as the war enters Day 60.

Israel's army on Monday sent dozens of tanks into southern Gaza as part of expanded, "aggressive" action against Hamas and its allies in the besieged territory. Israel has vowed to crush Hamas in retaliation for the militant group's unprecedented attacks that have killed thousands - mostly civilians, and saw around 240 hostages taken, according to Israeli authorities.