• An academic study claims that traders bet against the Israeli economy through short selling the main Israeli-company exchange-traded fund (MSCI Israel ETF) shortly before October 7th.
• The Tel Aviv stock exchange denounces these claims and deems the study inaccurate and irresponsible.
Firstly, an exchange-traded fund (ETF) is a basket of securities, and this gives people the opportunity to invest in a wider range of shares or bonds in one package, this is usually done to diversify one’s investment portfolio and reduce risk. An ETF also typically tracks or follows an index, for example the FTSE 100, in this case the ETF in question is the MSCI Israeli ETF which tracks the investment results of a broad-based index composed of Israeli equities. Meaning that the money a person would put in an ETF would be spread over a variety of Israeli companies.
From this, investors can measure how good an economy is doing based on how its companies perform and this can be done by paying attention to the stock exchange and ETFs. In other words, if an investor expects a country’s economy to perform well, they may buy ETF shares in hopes of its value increasing and making a profit.
In this case however, the study claims that traders may have had prior information of the October 7th attacks and subsequently started short-selling (mainly) the principal Israeli-company exchange-traded fund (MSCI Israel ETF). “Short selling” or “shorting” means that traders expect the economy to do badly and therefore bet against the economy in hopes of making a profit. This happens by traders borrowing the ETF from a broker and selling the ETF without actually owning it at its current price. After the ETF loses value (from the economy doing badly), the trader would buy it at the lower price and the difference between the buy and sell price is the profit after the ETF is returned to the broker. Therefore, having prior information of an event that would have a negative effect on the economy like the events of October 7th would make traders a lot of money.
The study by Jackson, Jr., Robert J. and Mitts, Joshua, ‘Trading on Terror?, December 4, 2023, https://ssrn.com/abstract=4652027/ http://dx.doi.org/10.2139/ssrn.4652027) makes a number of claims one of them being “on October 2nd, short interest in the MSCI Israel Exchange Traded Fund (ETF) suddenly, and significantly, spiked. And just before the attack, short selling of Israeli securities on the Tel Aviv Stock Exchange increased dramatically”. The study reported that “nearly 100% of the off-exchange trading volume in the MSCI Israel ETF on October 2 reported to FINRA consisted of short selling” calling this level of short selling “unusual”. The volume of this short selling is shown in the graph below. As the study states, “the short ratio remained extraordinarily elevated – twice returning to levels that had never before been reached during the period shown in the figure.”
Furthermore, the authors of the study carried out a placebo test to see if the short selling volumes were abnormal in comparison to the last 52 weeks. This placebo test showed that the volumes seen on October 2nd was the second highest in the period stated (52 weeks). The highest in that time frame occurred in April 2023. What is interesting about this is that it had been reported that Hamas’ original plan was to carry out these attacks in Passover which was on April 5th. The study reports that “The Times of Israel reported that: Hamas had initially planned its October 7 cross-border onslaught for the eve of Passover, but cancelled the attack after Israel raised the alert level, according to a Saturday report” Looking at the graph below we can see that short volume peaked on April 3rd at similar levels to October 2nd.
The authors of the study also identified that there was “no aggregate increase in shorting of Israeli companies on U.S. exchanges”. However, they did identify a sharp and unusual increase, just before the attacks, in trading in risky short-dated options on some Israeli companies expiring just after the attacks. Short-dated options are instruments that amplify the potential for high returns and the level of risk. From this evidence and more, the authors, rightly so, ask questions of whether prior information was available to people who have potentially made millions.
The Tel Aviv stock exchange (TASE) has since denied these claims calling it a “flawed analysis”. TASE mentioned some mistakes in the study one main one being that the profits from short selling in the Israeli bank Leumi totalled 3.2 billion shekels (£680 million) but instead it was 32 million shekels according to Yaniv Pagot (head of trading at TASE). Pagot makes further claims that “There was nothing unusual in short positions in the stock exchange in the two months before the attack.” Despite the currency mistake, the authors still question the “highly unusual” activities concerning ETFs and short-dated options.
While some of the issues were addressed by the Tel Aviv stock exchange and the Israeli securities authority, which suggested that “no significant trading abnormalities which would have necessitated further investigation were detected.”, the issue of the short-dated options on the US exchange hasn’t yet been addressed. Furthermore, Israeli regulators are denying the unusual activity even took place whilst The Times of Israel made a ridiculous claim on December 4th in an article that “Hamas may have profited from Oct. 7 assault with informed trading”. Meaning that The Times of Israel suggested that Hamas shorted Bank Leumi shares, even though they need approval from the exchange when taking such a large short position, shorted an Israeli equities ETF and traded options on US-listed Israeli equities.
Putting The Times of Israels’ claims aside, this issue must be investigated further and questions pertaining insider information and prior knowledge must be asked. Whether or not anyone had information of the attacks, what is clear is that some traders really felt the urge of betting against the Israeli economy before October 7th and made a lot of money in the process.
