Research shows that certain traders predicted the October 7 Hamas attack

Israeli companies saw an increase in bets against their value leading up to the October 7th Hamas attacks, indicating that some traders may have had forewarning of the impending terror attack and benefited from it, according to a new study released on Monday. The initial research, conducted by law professors at Columbia University and New York University, has not yet undergone peer review. It highlights a "significant" and "unusual" surge in short selling activity in the days leading up to the attacks within the most widely used fund connected to Israeli companies. Short selling involves betting against the value of a security.

The short selling activity targeting the MSCI Israel Exchange Traded Fund (ETF) in the days leading up to the October 7 attack surpassed that of the Covid-19 pandemic, the 2014 Israel-Gaza war, and the 2008 global financial crisis, according to the study.

The authors conclude that traders who were privy to information about the impending attacks were able to benefit from these unfortunate events.

Jonathan Macey, a Yale Law School professor, described the paper as "shocking." According to him, the strong evidence suggests that knowledgeable traders made a profit by predicting the October 7 terrorist attack. He also expressed concern that regulators seem unable to identify the individuals or entities involved in this trading activity, which he finds unfortunate.

On October 7, over 1,500 Hamas fighters launched an attack on Israel, resulting in the deaths of at least 1,200 people. Additionally, a number of individuals remain in captivity by Hamas. The paper, "Trading on Terror?" was authored by former SEC commissioner Robert Jackson Jr., now a professor at NYU, and Columbia law professor Joshua Mitts.

The Israeli Securities Authority and the US Securities and Exchange Commission did not respond to CNN's request for comment. In a statement to Reuters, the Israeli regulator mentioned that the issue is being investigated by all relevant parties.

The Financial Industry Regulatory Authority (FINRA) spokesperson, Bill Bagley, declined to comment on whether the organization is conducting an investigation, stating that the findings are preliminary and specific traders involved in the transactions cannot be linked or their sources of information determined.

However, the researchers point out that US regulators, such as the SEC and the Financial Industry Regulatory Authority (FINRA), have access to confidential data that could assist investigators in comprehending the reasons and mechanisms behind market behavior prior to October 7.

The paper noted that in the days leading up to the attack, there was a significant increase in bets against Israeli securities traded on the Tel Aviv Stock Exchange.

Between September 14 and October 5, researchers discovered that 4.4 million new shares were sold short in Bank Leumi, one of Israel's biggest banks. During October 4 to October 23, Bank Leumi saw a 23% drop in share prices.

Interestingly, there was no noticeable rise in short selling in Israeli companies traded on US exchanges during this time period. The authors suggest that this may be due to certain Israeli defense companies potentially profiting from increased demand after the attacks, as well as their substantial international presence.

The study found a rise in short-term options contracts for Israeli company shares on US exchanges. This was attributed to multiple block trades in options, indicating that a small group of entities may have been involved in this options trading activity.

Additionally, the research paper revealed that the significant surge in short selling on the Tel Aviv Stock Exchange before the October 7 attack was not observed prior to the market downturn following the enactment of judicial reform in July 2023, which sparked widespread protests in Israel.