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Finance and economics | Caught short

Who made millions trading the October 7th attacks?

Researchers highlight suspicious activity

Aerial picture shows abandoned and torched vehicles at the site of
the October 7th attack on the Supernova music Festival in southern
Israelimage: Getty Images
Dec 5th 2023 | Washington, DC
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Before its attack on October 7th, Hamas maintained tight operational
security. The assault blindsided Israel's spies, and seems to have
surprised even Hamas's political leaders. But did someone know enough
to profit? A new paper by Robert Jackson Jr, a former commissioner of
America's Securities and Exchange Commission, and Joshua Mitts of
Columbia University suggests so.

The authors' most striking finding is a surge in short sales--bets
that a security's price will fall--of an exchange-traded fund (etf)
listed on the New York Stock Exchange under the ticker eis, which
tracks an index of Israeli shares. In September an average of 1,581
shares a day of EIS were sold short, representing 17% of the daily
total trading volume. On October 2nd, five days before the attacks, a
whopping 227,820 shares were shorted, representing 99% of total
volume. Rather than reflecting a souring of market sentiment, the
increase in activity seems to have come from just two trades. Then,
on the first trading day after the attack, standard "long"
transactions outnumbered short sales by a similar number of shares
(248,009). If these trades were made by the same investor, they would
correspond to a $1m profit.

[20231209_FNC625]image: The Economist

Other securities also showed suspicious patterns. During the three
weeks before the attacks, the number of outstanding options contracts
expiring on October 13th on American-traded shares of Israeli
firms--the derivatives that would yield the greatest returns if prices
moved sharply in the direction a trader expected--rose eightfold. In
contrast, the number of longer-dated options on such shares, whose
value depended on events beyond mid-October, barely changed.

The paper's authors examined other periods of turmoil in Israel, such
as that prompted by the government's attempted judicial reform
earlier this year, and did not detect similar behaviour. The only
match was in April--two days before Passover, which according to
reporting by an Israeli tv station was the date originally scheduled
for the attack.

Critics of the paper, which has not yet been peer-reviewed, suggest
that the activity could reflect investors closing positions on the
first day of a quarter, or have been a market-maker's response to a
trader buying up shares in the fund. Yet no surge has occurred at the
start of any other quarter since 2009. The authors say that had any
large purchases of eis been made to offset the shorts, such
transactions would appear in their data. Another objection is that
although a big short sale should in theory drive down prices, eis
actually rose in value. In response, the authors note that the fund's
value is tied to the prices of the shares it contains, and that the
shorts of EIS were tiny in comparison with the market capitalisation
of the firms the fund tracks.

The study has prompted an inquiry by Israel's securities authority.
Assigning motives to trading activity is always hard; the authors
cannot rule out benign explanations. But they argue that the most
plausible account is that whoever made the trades was familiar with
Hamas's secrets. Although the millions of dollars in potential
profits are small, Mr Mitts notes they are a lower limit identifiable
with public data. He thinks that they could be "just the tip of the
iceberg".#

Editor's note (December 7th 2023): This article has been updated to
include criticism of the study and the authors' response to it.

For more expert analysis of the biggest stories in economics, finance
and markets, sign up to Money Talks, our weekly subscriber-only
newsletter.

This article appeared in the Finance & economics section of the print
edition under the headline "Caught short"

Finance & economics December 9th 2023

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How peace is possible

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