Scanning capital markets could help fend off terror attacks | Mint

Scanning capital markets could help fend off terror attacks

According to the study, the scale of the short bets placed was “really extraordinary,” even more so than when the financial crisis of 2008 hit, 2014 Israel-Gaza war erupted and the covid pandemic broke out.  (MINT_PRINT)
According to the study, the scale of the short bets placed was “really extraordinary,” even more so than when the financial crisis of 2008 hit, 2014 Israel-Gaza war erupted and the covid pandemic broke out. (MINT_PRINT)

Summary

  • That some traders may have acted on a tip-off about the Hamas attack of 7 October suggests that intelligence agencies could use AI scanners to spot signs of danger in market patterns.

A new study in the US suggests some market players placed bets in anticipation of Hamas’s 7 October attack on Israeli targets in which more than 1,200 people were killed. While it’s unsettling to contemplate profits made off terror, could trading patterns serve as intelligence inputs for agencies tasked with thwarting such attacks? If market participants have information about what’s going to happen, no matter how few they are, it might be useful to watch out for suspicious activity. But linking any market trades to foreknowledge of violence is easier said than done. In the case of Israel, suspicions have been stoked by a study titled Trading on Terror? by Robert Jackson Jr and Joshua Mitts, who teach law at New York University and Columbia University, respectively. Jackson Jr has also been commissioner of the US Securities and Exchange Commission. Their research has revealed a spike in apparent punts made just days before October’s outrage on the value of some Israeli company shares dropping. This was done through short-selling on the Tel Aviv Stock Exchange of a top exchange-traded fund invested in these firms.

According to the study, the scale of the short bets placed was “really extraordinary," even more so than when the financial crisis of 2008 hit, 2014 Israel-Gaza war erupted and the covid pandemic broke out. “The stock market was screaming, ‘There’s something going on!’," Mitts told CBS News. Short-selling is the sale of borrowed securities in anticipation of their prices falling, so that they can then be bought cheaply to complete the deal and pocket the difference. Since the study’s findings are preliminary, the quantum of profits cornered has not been determined, although the authors are reported to estimate that millions of dollars were made. Conclusions can be drawn only once a full probe is done; Israeli authorities have said “all the relevant parties" are on it. Typically, the difficulty in such cases would be for sleuths to establish a link between trading activity and actual knowledge of a plan. Price volatility can occur for varied reasons and it is the job of markets to accommodate divergent views, even extremes that go by hunches or odd theories that most of us may dismiss. Trading algorithms that act on complex cues could make drastic moves of their own too. Some can mirror trades and amplify patterns that would otherwise fly under the radar. Inferences of what exactly who knew are not easy to draw. Yet, ill-gotten gains made this way are probably a reality of our times. “Our findings suggest that traders informed about the... attacks profited from these tragic events," notes the report.

While ‘insider trading’ that involves access to data on malevolence may be hard to prevent, what’s relevant is whether unusual trading can serve as a red flag in sufficient time to pre-empt the very adversity that’s being bet upon. With the bad guys getting more sophisticated, maybe the good guys need the aid of artificial intelligence (AI) in scanning vast volumes of data for signs of danger. The noise-to-signal ratio of such an advance warning system may be dismal to start with, but machines are reputed to have steep learning curves, so actionable leads could emerge from the exercise. Of course, care must be taken to ensure that this does not result in regulatory overreach or privacy violations. But if capital markets can tempt dark secrets out of people, then we should do our best to decode what’s being revealed by such trades.

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