Troubling theory about traders profiting from the Hamas attacks on Israel drew much attention. It’s not so simple.

December 9, 2023
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It’s a dramatic and troubling claim: Two New York law professors, one of them a former commissioner of the Securities and Exchange Commission, say that bets were made against Israeli stocks in October and made millions after Hamas attacked Israel.

The allegations in the Social Science Research Network journal haven’t been peer-reviewed yet. But they attracted a lot of attention, partly because — as the authors acknowledge in their paper — there is no way to know if the trades were made by people connected to Hamas or people connected to Israel or neither.

The paper itself is a preliminary draft, written by Robert J. Jackson Jr., who was an SEC commissioner from 2018 to 2020 and is now a professor at New York University School of Law, and Joshua Mitts, a professor at Columbia Law School.

“Our findings suggest that traders informed about the coming attacks profited from these tragic events,” they wrote, referring to the attacks of Oct. 7.

The day after the attacks, Israel’s main stock exchange fell 8%.

But based on the data that is available to researchers and the public, it’s hard to say if it happened the way they theorized.

“There is not enough hard evidence to say definitively what happened,” said J.J. Kinahan, who has been involved with options trading since 1985. He is the the CEO of IG North America, which has an options trading business called Tastytrade.

“Without hard evidence of a brokerage statement or hard evidence of a trade, it’s hard to say ‘this happened,’” he said.

Israel’s stock exchange has rejected the claims that there was unusual trading activity before Hamas’ attacks. About 1,200 people in Israel died, and more than 200 were taken hostage, according to Israeli officials. The subsequent war has killed more than 17,000 Palestinians in the Gaza Strip, according to health officials there.

In terms of the initial attention and speculation the paper received, it did not help that in an earlier version of the report, the authors overstated the profits of one trade by a factor of 100. They mistook the Israeli equivalent of cents, or agorot, for dollars, or shekels, and said that these unknown parties may have made around $860 million in profit from a single short position against a large Israeli bank. With that error corrected, the actual profit would have been $8.6 million.

Jackson and Mills wrote that beginning in early October, some traders started betting that Israeli stocks were going to fall. They did that by taking short positions, stock market trades in which a person or company borrows a stock from someone else and then sells it. If the price of that asset falls below the sale price, they can then buy it back for a profit.

For example, Jackson and Mitts said, that on Oct. 2, there was an unusual increase in shorts taken out against the MSCI Israel Exchange-Traded Fund, a collection of 117 different Israeli stocks that traders can buy or sell the same way they could an individual stock.

“We document a significant spike in short selling in the principal Israeli-company ETF days before the October 7 Hamas attack,” they wrote.

The professors say that these bets were unusual given the context of Israel’s economy at the time. And they added that these unknown traders were taking bigger risks in the early days of October, which could mean they were more confident a big decline was coming.

Kinahan said it’s hard to know if that’s really what the traders were expecting. One reason is that traders often use options to hedge their market bets.

It might look sinister that someone shorted some Israeli stocks days before Hamas attacked, but Kinahan said it’s just as possible the traders actually made a far larger bet that Israel’s economy would thrive and hedged that bet by shorting some stocks and the MSCI ETF. That’s a common strategy used to mitigate potential losses.

“There could be a stock trade that this is the other side of,” he said.

It’s a limitation the authors acknowledged in the paper. Still, according to Mitts and Jackson, their research shows that short selling of Israeli stocks on the Tel Aviv Stock Exchange and shorting of Israel stocks in the United States also increased dramatically before the attacks.

News reports said that Hamas initially planned to attack Israel in early April, and the authors said they have found signs of similar shorting actions at that time. They said that could show that someone was prepared to implement the same trading strategy.

Yaniv Pagot, head of trading at the Tel Aviv Stock Exchange, said the authors did not understand the Israeli market.

“This is a flawed analysis from the outset and there is a lack of understanding of how the local market operates. It is unfortunate that the researchers did not check with Israeli stock exchange members, they could have asked how these things work in the country,” he said in a statement emailed to NBC News.

Kinahan also told NBC that while some stocks were shorted at greater than usual levels compared to typical trading, most of the stocks themselves are lightly traded. That means fluctuations in those stocks can look bigger than they really are.

The SEC told NBC News that it doesn’t comment on the existence or nonexistence of investigations, and the Financial Industry Regulatory Authority declined to comment.

In the aftermath of the terrorist attacks of Sept. 11, 2001, there were theories that someone connected to Al Qaeda shorted airlines and other stocks that suffered especially large declines once U.S. markets reopened six days after the attacks. The SEC spent almost three years looking into the matter, and said in 2004 that it “did not develop any evidence suggesting that anyone who had advance knowledge of the September 11 attacks traded on the basis of that information.”

For example, one trader who bet that United Airlines stock would fall turned out to have made a large corresponding bet that American Airlines would rise. Other suspicious trades on Sept. 10, 2001, were linked to a newsletter that had been faxed to subscribers the day before.




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