Researchers from the New York University School of Law and Columbia Law School documented a significant spike in short selling in the principal Israeli-company ETF days before the October 7 Hamas attack. 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 Israel-Gaza war, and the COVID-19 pandemic.
Similarly, researchers identify increases in short selling before the attack in dozens of Israeli companies traded in Tel Aviv. For one Israeli company alone, Bank Leumi, 4.43 million new shares sold short over the September 14 to October 5 period yielded profits (or approximates avoided losses) of millions on that additional short selling for one out of hundreds of securities traded on the TASE.
Although researchers saw no aggregate increase in shorting of Israeli companies on US exchanges, they 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. They identify similar patterns in the Israeli ETF at times when it was reported that Hamas was planning to execute a similar attack as in October.
The findings suggest that traders informed about the coming attacks profited from these tragic events, and consistent with prior literature show that trading of this kind occurs in gaps in US and international enforcement of legal prohibitions on informed trading. Researchers contribute to the growing literature on trading related to geopolitical events and offer suggestions for policymakers concerned about profitable trading on the basis of information about coming military conflict.
Responding to the study in media outlet Globes, Tel Aviv Stock Exchange EVP head of trade Yaniv Pagot identified discrepancies in the data. Bank Leumi shares are among the most traded on the TASE and were at the heart of the research that found a sharp and significant rise in short sales of Bank Leumi shares as well as ETFs that track Israeli companies in the days preceding the surprise Hamas attack on October 7.
Pagot said to Globes, “What the researchers did in the study was to assume through lack of familiarity with the local market that share prices in Israel are quoted in shekels rather than agorot (100 agorot equals a shekel). From this there were many mistakes. In the research they took the increase in the short sales balance on 4,500,000 shares. The researchers estimated that the price per share fell from NIS 734 instead of 734 agorot or NIS 7.34. Therefore they calculate a profit of NIS 3.2 billion (in Leumi shares) when in practice the profit was only NIS 32 million [$8.6mn]. The researchers magnified the loss per share 100 times. This is a fundamentally mistaken assumption.”
Pagot also said: “There is also a lack of understanding of what happens on the capital market in Tel Aviv. If we assume that somebody carried out a huge short sale in a share, whoever made such a short sell would be completely transparent to the local regulator because he has to sign a share lending agreement with a TASE member. So would somebody from Hamas or a straw company acting on their behalf sign a share lending agreement on the TASE? Even if somebody wants to borrow shares worth NIS 500 million, they need to identify themselves to a bank and take out a credit framework. So the bank need information on who is involved. There are matters like money laundering etc. In other words, there could not be such a scenario. It is regrettable that the researchers did not check with Israeli TASE members and they could have asked how these things work in Israel.”
Globes’ examination of TASE data does find that there was a consistent rise in short trading balances on Bank Leumi shares prior to the outbreak of the war. On July 26 there was NIS 285 million in short trade balances on Bank Leumi, which has climbed to NIS 407 million by the last week of September and NIS 422 million on October 5. By November 2, almost a month after the start of the war, the short trade balances on Leumi’s share had fallen to NIS 371 million, and fell further to NIS 355 million on November 23. The rise in short positions ahead of the outbreak of the war and the fall after the start of the war, shed additional light on the matter.