During preparations for the October 7 attack on Israel, Hamas maintained tight operational security. The timing of the attack caught the Israeli military and intelligence services by surprise, and appears to have even surprised some Hamas political leaders. However, a recent working paper by Robert Jackson Jr., former commissioner of the U.S. Securities and Exchange Commission, and Joshua Mitts of Columbia University, indicates that someone had enough prior knowledge of the scheme to win. a small fortune taking advantage of a drop in the Israeli stock market.
The authors have analyzed the trading patterns of Israeli stocks in the weeks leading up to the attack, and have found anomalies consistent with a crude form of informed trading. Perhaps the most striking example is the increase in short selling (bets on the price of a security falling) of a relatively illiquid exchange-traded fund (FCB) listed on the New York Stock Exchange under the symbol EIS and which continues an index of Israeli stock prices.
In September, an average of 1,581 EIS shares were sold short per day (for a total value of about $85,000), representing 17% of that FCB’s total daily trading volume. However, on October 2, five days before the attacks, a staggering 227,820 shares were shorted, making up 99% of EIS’s volume that day (see chart). Rather than reflecting a deterioration in market confidence in Israeli equities, the entire increase in activity appears to have come from two transactions: a sale of 50,733 shares just before 3:00 p.m. and another of 174,869 shares 35 minutes later. Whoever made those trades may have made a profit of $1 million in less than a week, plus an additional million in the next three weeks.
Other securities linked to Israeli stocks also showed suspicious patterns. During the three weeks before the attacks, the number of outstanding options contracts expiring on October 13 on shares of Israeli companies listed on US exchanges (derivatives that produce the greatest profits if prices move sharply in the address expected by an operator; and which expire worthless otherwise). In contrast, the number of longer-term options on these shares, whose value depended on events after mid-October, barely changed.
Could there be another cause? Short selling of airline stocks before 9/11 may have been due to impending earnings announcements. However, in the current case there does not seem to be such an alternative, says Eric Zitzewitz of Dartmouth College. The article’s authors have examined other recent periods of unrest in Israel, such as that sparked by the government’s attempted judicial reform earlier this year, and have not detected similar behavior. The only correspondence with anomalies occurred in early April, two days before Pesach, the Jewish Passover, the date that, according to a report on Channel 12 of Israeli television, was the date initially planned for Hamas to launch its attack.
The study has led to an investigation by the Israel Securities Authority. Given the secrecy with which the preparation of the attacks was carried out, it is unlikely that the news was leaked to a Wall Street short seller. Unless it was a case of pure luck, it is likely that whoever carried out the operations belongs to Hamas, or is close enough to the organization to know its military secrets. In the past two months, the United States has only banned one trading company for its ties to Hamas: a Gaza cryptocurrency exchange linked to illicit transactions worth a meager $2,000. Someone has managed to deliver a much bigger blow. Mitts believes the operations he and his co-author have detected are “just the tip of the iceberg.”
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Translation: Juan Gabriel López Guix
