Before the significant escalation of the Israel-Palestine conflict on October 7, which led to a plunge in the Israeli stock market, currency devaluation, and downgraded economic growth forecasts, U.S. researchers discovered that investors might have shorted the Israeli stock market to profit from the conflict. Israeli authorities are currently investigating these claims.
Former U.S. Securities and Exchange Commission member and New York University School of Law scholar Jackson, along with Columbia Law School's Mitz, published a paper on SSRn, a preprint academic journal website, on December 4. The paper, titled "Trading on Terror?", recorded the dynamics of the Israeli stock market and found a significant increase in short-selling activity targeting the MSCI Israel Exchange-Traded Fund (ETF) five days before the conflict escalated.
Jackson and Mitz suggest that someone with prior knowledge of Hamas's attack on Israel on October 7 took measures to short the Israeli stock market, thereby reaping substantial profits from the trades. The paper indicates that this short-selling activity was more extensive than during other periods of crisis, including the 2008 financial crisis, the 2014 Israel-Palestine conflict, and the economic downturn following the COVID-19 pandemic.
Typically, the Israeli ETF trades about 2,000 shares daily, but on October 2, this number soared to 227,000 shares. Mitz noted that shorting just one Israeli company's stock could generate nearly $900,000 in profit.
The New York Times reported last week that Israeli officials had known about Hamas's attack plans more than a year before the recent conflict erupted, but military and intelligence officials did not take it seriously, believing Hamas lacked the capability to execute the plan.
Earlier this year, news of a potential escalation in the Israel-Palestine conflict led to a surge in short-selling trades. In early April, when there were reports of a planned Hamas attack on Israel, short-selling trades targeting the MSCI Israel ETF peaked on April 3, very similar to the levels observed on October 2 this year.
Although the paper by Jackson and Mitz has not yet been peer-reviewed, its findings have sparked extensive discussion. Yale Law School professor Jonathan Macey expressed shock at the findings, stating that the evidence strongly suggests that someone profited from the stock market using advance information about the Hamas attack, but regulatory bodies either failed to detect such trades or lacked the capability to do so.
Axios, a U.S. digital news site, believes that while the case presented in Jackson and Mitz's paper is convincing, further investigation is needed. Jackson and Mitz emphasized that their findings are preliminary, and they could not identify the specific individuals or their sources of information who shorted the Israeli stock market.
Given the current uncertainty about whether the traders are associated with specific financial firms, government departments, or terrorist organizations, Jackson and Mitz urged caution before drawing specific conclusions. The Israel Times reported that Hamas might be linked to the short-selling of the Israeli stock market, but Mitz advised against directly connecting Hamas to the incident, considering it a speculation. He also suggested another possibility: someone inadvertently learned of Hamas's plan and sought to profit from the attack.
In an interview, Mitz said that based on the available data, all the trades appeared to be from the same trader. He was pessimistic about identifying the person behind the trades, stating that it would be extremely difficult to determine who executed these trades and profited from them, and preventing such trades in the future would not be easy.
However, some researchers pointed out that the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority could access non-public data to determine the specific reasons behind the turmoil in the Israeli stock market before October 7.
Charles Whitehead, a professor at Cornell Law School, believes that regardless of the investigation's outcome, the stock market's fluctuations warrant close attention. If there indeed were manipulators behind the scenes, then the information released by the stock market should become part of intelligence work. Mitz added that anomalies in the stock market could serve as an intelligence tool to assist public choices and government decision-making.