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Giant gambles against Israel on the markets in Tel Aviv and Wall Street days before Hamas’ attack made billions. Somebody seems to have known about the plan in advance

Hamas’ attack on Israel on October 7 caught the Israeli army unprepared. But somebody seemingly knew in advance and made billions betting against Israeli shares traded locally and on Wall Street five days before the attack.

Short-selling Israeli shares – betting that they will fall – spiked in the days before October 7, far exceeding the short selling during “numerous other periods of crisis,” Robert J. Jackson, Jr., Joshua Mitts and colleagues wrote in a paper titled “Trading on Terror?” published Sunday on SSRN.

'Our findings suggest that traders informed about the coming attacks profited from these tragic events.'

While the source of the putative information leading to the short selling isn’t known, it plausibly originated in Hamas circles: “Our findings suggest that traders informed about the coming attacks profited from these tragic events,” they wrote.

Jackson served as commissioner of the U.S. Securities and Exchange Commission and Mitts is an expert on short selling, where the investor is betting against the security. He is also familiar with the Israeli market.

The ex-commissioner and the team examined transactions in EIS, which is a security traded on the New York Stock Exchange through which investors can gain exposure to Israeli shares (MSCI Israel Exchange-Traded Fund, or NYSE: EIS).

EIS is an exchange-traded fund that tracks Israeli shares in New York. It’s a way to bet on Israeli shares without buying any. EIS tracks the main indices on the Tel Aviv Stock Exchange, including giant Israeli companies such as Nice, Teva, the banks, Elbit Systems and Israel Chemicals.

Investing in EIS is equivalent to investing in the Israeli economy. Betting against EIS means you are betting against the Israeli economy.

Jackson and the team found strong indications that, in early October, somebody in U.S. stock market circles anticipated catastrophe in Israel, leading stocks to crash.

On October 2, that somebody or somebodies carried out an enormous volume of short transactions on the EIS – meaning they bet against Israel.

In fact, the volume of short transactions on October 2 was so huge – 227,000 units, compared with a few thousand on any given day – that it didn’t seem like a gamble. Whoever was behind the transactions apparently harbored confidence that disaster would strike Israel.

Shorting involves profiting from securities you do not own. If you are confident that a given company’s shares are going to fall, you borrow them from somebody, sell them, and later (sometimes just within days) you buy them on the market (at the lower price, if you were right), give them back to the lender and pocket the difference.

So, if you short a stock and it falls, you win. People shorting Israeli shares on October 2 did well. The value of EIS fell by 7.1 percent on October 11 (the first day the American market was open for business after the massacre) and over the 20 days following that terrible weekend, EIS lost 17.5 percent of its value.

'Moreover, it indicates that the short selling that day far exceeded the short selling that occurred during numerous other periods of crisis, including the recession following the [2008] financial crisis.'

Specifically, if a trader borrowed a unit of EIS and sold it for $54, after the crash the trader could buy the unit for $44.50, return it to the lender and make $9.50 per unit.

The paper by Jackson and colleagues was based on data officially reported to the U.S. Financial Industry Regulatory Authority. The researchers identified two huge transactions selling borrowed units of EIS on October 2. Based on the volumes, the short sellers seem to have made millions of dollars.

To examine how unusual the gamble against Israel was, the researchers checked the volume of short transactions in EIS units from 2009 to 2023, during which Israel experienced plenty of crises. There were 3,570 trading days throughout that period. The volume of shorts on EIS on October 2 was in the top 99 percent percentile. The “short ratio” for EIS was also extraordinary on October 2: “It is extremely unlikely that the volume of short selling on October 2 occurred by random chance,” they wrote.

“Moreover, it indicates that the short selling that day far exceeded the short selling that occurred during numerous other periods of crisis, including the recession following the [2008] financial crisis, the 2014 Israel-Gaza war, and the COVID-19 pandemic,” they added.

Other grounds for their suspicion are the fact that the short transactions were carried out during the Sukkot Jewish holiday, when nothing unusual was happening in Israel and nothing dramatic was expected.

Jackson and Mitts even checked for correlation between the shorting and the Netanyahu government’s plans to overhaul the judiciary, where the greatest drama was on July 24 – the day the Knesset voted to revoke the reasonableness standard. The date of the vote was known in advance, though its results were not. In fact, EIS units lost 5 percent of their value following that vote, attesting that the market hadn’t anticipated the outcome. There was no unusual volume in shorts.

Also, shorting is risky. If you bet against a share and it rises, you lose. The bigger the short, and the longer it lasts (until you have to return the security), the bigger the risk. The giant gamble against EIS (meaning, against the Israeli economy) was done when the market was trending upward. Betting against a market trend just increases the risk. Also, the shorts were unusually long, strengthening the theory that the investor knew of the attack in advance.

Interestingly, Mitts and Jackson identified similar patterns in EIS in April, when rumors were circulating that Hamas was planning to launch an attack. “Specifically, short volume in EIS peaked on April 3 at levels very similar to those observed on October 2,” they stated. There, too, coincidence beggars belief and suggests the information originated in Hamas. Terrorists caught in Israel related that the attack had been planned for April 5, Passover eve, but was canceled at the last minute – whether because Iran ordered it so, according to some media sources, or because the Israeli army was on high alert at the time.

The short spike on April 3 was about a week after Prime Minister Benjamin Netanyahu tried to fire his defense minister, Yoav Gallant, triggering mass protests by Israelis. By April 3, however, it was clear that Netanyahu had reversed course on ousting Gallant – indicating that whoever was shorting Israel wasn’t doing so because of that rumpus, but because of the planned (albeit canceled) terror attack.

Very short in Tel Aviv

The researchers also looked into shorts on the TASE and found a significant spike in the days before October 7.

In fact, shorting on the TASE began to increase from August, but peaked in the week before the attack. There was no obvious reason for the behavior; Israel was on holiday, the public sector was shuttered and a lot of Israelis were on vacation. There is no reason to associate the shorting spike with the judicial overhaul, the researchers said, noting there was no particular shorting activity following the “reasonableness” vote in July.

Again, the suspicion arises that somebody had prior knowledge of the Hamas attack.

In addition, Jackson and Mitts didn’t identify an increase in short-selling shares in Israeli companies traded in New York (as opposed to short selling the index tracking Israeli shares). That could be because investors figured the military industries would do well from hostilities and many of the other companies operate in the international markets, so the terror attack on Israel shouldn’t hurt their business.

They noted that while the volume of additional trading in EIS was absolutely abnormal in New York, it wasn’t large in absolute terms – probably because there just isn’t that much trading in its units. But they definitely did observe spikes in short selling on the Tel Aviv Stock Exchange.

Shorting the TASE from mid-September to October would have been enormously lucrative, the researchers calculate. In just Bank Leumi alone, “4.43 million new shares sold short over the September 14 to October 5 period yielded profits (or approximates avoided losses) of 3.2 billion NIS [nearly $900 million] on that additional short selling.”

They couldn’t identify whether there was any connection between traders short selling in New York and Tel Aviv.

Note that Jackson and Mitts do not claim the information originated in Hamas. But the information they collated suggests as much. Hamas had planned the attack for months and its leader, Yahya Sinwar, seems to have planned not just the tactical aspect but logistical and financial aspects as well.

If one believes Hezbollah leader Hassan Nasrallah that he didn’t know about the Hamas attack in advance, then Hezbollah wasn’t the one shorting Israel. Nor Iran, by the same logic. Only investigation by law enforcement, in Israel and the United States, may uncover who benefited from the short transactions.

Note that shorting isn’t illegal, and U.S. securities law apparently doesn’t prohibit exploiting preknowledge of a terror attack. Nor is it some kind of insider-trading violation in Israel. But Israeli sources said Hamas has financially savvy people and it isn’t implausible that they lay behind these shorts. Furthermore, if the short selling was done by Hamas or on its behalf, then they are violations of the U.S. law prohibiting the financing of terror, and the United States could freeze the ill-gotten gains.