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Israeli authorities are investigating claims by US researchers that some short sellers may have Front run the Hamas plan to attack Israel on Oct. 7, using the advance knowledge to profit from Israeli securities, according to a report by Israel’s financial news website The Marker.
Front running is the practice of entering into an equity trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying security.
Shorting is a way to capitalize on a likely decline in a stock, an industry, or even an entire market sector. Short selling occurs when an investor borrows a security, sells it on the open market, and expects to buy it back later for less money.
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 Hamas attacks on Israel, which triggered a war nearly two months old.
“Days before the attack, traders appeared to anticipate the events to come,” they wrote, citing short interest in the MSCI Israel Exchange Traded Fund (ETF) that “suddenly, and significantly, spiked” on Oct. 2 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 wrote in their 66-page report.
The researchers said short-selling, in which investors expect the share price to fall, allowing it to be bought back at a lower price at a profit, prior to Oct. 7 “exceeded the short- selling that occurred during numerous other periods of crisis.”
That includes the recession following the financial crisis in 2008, the 2014 Israel-Gaza war, and the COVID-19 pandemic.
They wrote that for Leumi LUMI.TA, Israel’s largest bank, 4.43 million new shares sold short over the Sept. 14 to Oct. 5 period yielded profits of 3.2 billion shekels ($862 million) on that additional short-selling.
“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,” they 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.”
The professors referred to patterns in early April when it was reported that Hamas was initially planning its attack on Israel. “Short volume in EIS (the MSCI Israel ETF) peaked on April 3 at levels very similar to those observed on Oct. 2, and was far higher by an order of magnitude than other days prior to April 3,” they said.
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