Israel-Palestine war: Israel investigating spike in short selling before 7 October attack

Israel is investigating claims that investors may have known in advance that Hamas was planning to attack southern Israel on 7 October.

Research by law professors Robert Jackson Jr from New York University and Joshua Mitts of Columbia University found significant short-selling of shares leading up to the attacks.

"Days before the attack, traders appeared to anticipate the events to come," the researchers wrote, citing short interest in the MSCI Israel Exchange Traded Fund (ETF) that "suddenly, and significantly, spiked" on 2 October based on data from the Financial Industry Regulatory Authority (FINRA).

"And just before the attack, short selling of Israeli securities on the Tel Aviv Stock Exchange (TASE) increased dramatically," they added in a 66-page report, as reported by Reuters. 

Short-selling involves profiting from securities you don’t own. It is the process where if you are confident that a company’s shares are going to fall, you borrow them from somebody, sell them and later buy them on the market at a lower price. Profit is made in the difference after giving it back to the lender. 

According to the researchers, the short-selling that occured before 7 October exceeds by far the short-selling that occurred during numerous other periods of crisis. This includes the financial crisis in 2008 and the Covid-19 pandemic. 

The Israel Securities Authority told Reuters: "The matter is known to the authority and is under investigation by all the relevant parties."

Pocketing millions

"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," the researchers said.

"Our findings suggest that traders informed about the coming attacks profited from these tragic events, and consistent with prior literature we show that trading of this kind occurs in gaps in US and international enforcement of legal prohibitions on informed trading."

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According to a report in Haaretz, Jackson and his team examined transactions in EIS, an exchange trade fund that tracks Israeli shares in New York.

The report added that EIS is a way to bet on Israeli shares without buying any, and tracks the main indices on the Tel Aviv Stock Exchange, including large companies such as Elbit Systems, Israel Chemicals, Nice and Teva. 

On 2 October, the transactions had increased to 227,000 units, compared with a few thousand on any given day.

The researchers identified two huge transactions selling borrowed units of EIS on 2 October. Based on the volumes, the short sellers seem to have made millions of dollars.