Someone knew: Stock traders made millions short-selling before Oct. 7th Hamas attacks

NEW YORK—Some investors active on the New York and Tel Aviv Stock Exchanges (NYSE and TASE) apparently knew in advance that Hamas militants were about to launch their attack on Israel before Oct. 7th and that a war would follow. They used that knowledge to cash in by short-selling Israel-linked shares, generating a profit windfall worth millions of dollars.

That’s the claim being made by researchers at New York University and Columbia University. “Our evidence is consistent with informed traders anticipating and profiting from the Hamas attack” and the war that erupted in its wake, financial market experts Robert J. Jackson, Jr., of NYU and Joshua Mitts of Columbia concluded in an explosive paper published Dec. 4.

The two professors’ meticulously-documented report, titled “Trading on Terror?”, details what they call a “significant spike in short-selling in the principal Israeli-company ETF [Exchange-Traded Fund]” on the NYSE in the weeks before Oct. 7th and similar short-selling moves against dozens of Israeli companies listed on the TASE. They rely on data from the Financial Industry Regulatory Authority (FINRA), which they say is still incomplete.

The practice of short-selling is a bet by traders that a company’s stock price will go down in the near future. For a small fee, short-sellers “borrow” shares of a corporation or fund that they believe will soon drop.

While the price is still up, they sell the borrowed shares. Then, when the price drops, the short-sellers “close their position,” meaning they re-buy the shares and return them to the broker they borrowed them from, pocketing the difference and potentially making huge profits.

Typically, short-sellers make such bets because they disagree with analyst consensus about a particular company’s financial health. Sometimes, however, it’s because they have insider knowledge about events that will impact a company’s business before they happen.

According to the research published in “Trading on Terror,” that is exactly what seems to have happened in relation to Oct. 7th. “Days before the attack, traders appeared to anticipate the events to come,” Jackson and Mitts declared.

Citing trading activity in New York, they said the main exchange-traded fund that broadly tracks the performance of the Israeli stock market as a whole “suddenly and significantly spiked” on Oct. 2—five days before the attacks.

Looking at the volume of short-sells of MSCI Israel ETF (stock code: EIS), they say it was “extraordinarily high and unlikely to have been explained by bona fide market making” because there were no purchases to offset sales. The trading was all in one direction: “Nearly 100% of the trading volume in EIS…consisted of short-selling.”

When the volumes of short trades in the month prior are mapped against the activity of Oct. 2, they are barely even visible on the chart. It was greater than 99% of the previous 3,570 trading days—over 14 years.

The level of insider knowledge becomes even more apparent when the expiration dates of the short-sell options contracts are examined. When short-sellers borrow shares, their contracts always come with a deadline—the date by which they must return the borrowed stocks to a broker. The demand for short-sell options contracts set to expire on Oct. 13 increased more than 1,000% in early October, but the contracts expiring after the 13th showed almost no movement.

That means the trades were targeted and premised on something happening before Oct. 13; the short-sellers were betting something big would happen before that time and have an immediate impact on the Israeli economy.

In Tel Aviv, meanwhile, the short-selling of individual Israeli companies also “increased dramatically,” with the profits conceivably surpassing “$100 million.”

Comparing the scale of what happened in the days before Oct. 7th, the researchers conclude that it far “exceeded the short-selling that occurred during numerous other periods of crisis,” including the 2008 Financial Crisis, the Great Recession, the 2014 Israeli war against Gaza, and the COVID-19 pandemic.

Given that the pre-attack period also coincided with the Jewish holidays, which is normally a time of low trading activity in Israel, the researchers implied that the volume of trades becomes all the more suspicious.

As one example, they examined shares in Israel’s largest bank, Leumi. More than four million shares were sold short between mid-September and Oct. 5. Immediately after the Hamas attacks and the launch of the Israeli military’s war against Gaza—on Oct. 8—Leumi’s share price plummeted 9%. The same story could repeat for dozens of other companies, but the researchers say they await further data.

They believe there is already enough information to draw some conclusions, though: “Our evidence is consistent with informed traders anticipating and profiting from the Hamas attack.”

A certain group of capitalists knew the terrorist attacks were coming; they knew that Prime Minister Benjamin Netanyahu would of course launch a war in response; and they knew that the Israeli economy would be negatively impacted in the immediate aftermath of these events.