Move along, there's nothing to see! The Tel Aviv Stock Exchange wanted to put an end to the media deluge on Wednesday, December 6, concerning possible stock market speculation around the October 7 terrorist attacks in Israel. She rejects the idea that stock traders could have known about the Hamas attack in advance.

The Tel Aviv Stock Exchange (TASE) has described as "false and out of touch with reality" the study by two American economists that has caused a lot of ink to flow since its publication on Monday 4 December. Robert J. Jackson Jr., an economist at New York University, and Joshua Mitts, a lawyer at Columbia University, claimed to have discovered "very unusual" speculative activity days or even weeks before the Oct. 7 attacks that led to the war between Israel and Hamas.

Conspiracy theory?

Unidentified stock market players made millions of dollars by deciding between late September and early October to bet against Israeli companies listed on the Tel Aviv and New York stock exchanges, the two experts point out in their study.

This shocking study did not fail to give rise to headlines such as "Hamas allegedly profited on the stock market from the attacks of 7 October" or "Speculators warned in advance of the planned attack on Israeli soil".

A media one-upmanship that caused the Israeli stock exchange authorities to react. Two days after the publication of the study, they first assured that they were "aware [of the study's conclusions] and had launched an investigation" before denigrating the work. "The findings of our review did not raise any concerns about suspicious activity on the stock exchange in Israel," the Israel Financial Markets Authority told The Times of Israel.

In particular, the Israeli regulator pointed to a "gross error" by American economists who analysed transactions on Israeli financial markets in shekels (the Israeli currency) while some company shares are only given in agorot, i.e. the Israeli equivalent of cents.

See alsoGaza - Israel, one month on: the cost of the war

These criticisms were also picked up by the British Financial Times. The British business daily is not far from putting the findings of the study in the conspiracy theory box. He even goes so far as to compare this work to conspiracy theorists' claims that speculators knew about the September 9, 2001 attacks in the United States.

The two authors of the study acknowledged their error and amended certain passages concerning the presumed size of the gains recorded by speculators. In some cases, these profits have been divided by 100.

But they stand by their overall conclusions. "We have to recognize that the data they provide appears to be solid," said Antoine Andreani, a senior financial analyst at XTB, a stock broker.

'Unusual' rise in short selling

The study focuses primarily on stock market transactions around the MSCI Israel Exchange-Traded Fund (EIS), a financial product indexed to the performance of some fifty Israeli companies listed on the New York Stock Exchange and the Tel Aviv Stock Exchange. If the latter soar, the EIS pays off handsomely... and vice-versa.

At the beginning of October, speculators bet heavily on the upcoming decline of the MSCI Israel Exchange-Traded Fund. "Almost 100% of the transactions recorded on October 2 by the Financial Industry Regulatory Authority [Finra] were short selling," the two US economists said.

These short sales are one of the favorite weapons of speculators. They borrow securities - stocks or other financial products - which they sell at the market price with a commitment to buy it back later. If, in the meantime, the price of that security has fallen, these speculators can keep the difference - the profit made - between the price at which they sold it and the price at which they bought it.

In other words, this sharp rise in short selling on the EIS means that some speculators had anticipated an imminent fall in the stock market in Israel. This is what happened after the Hamas terror attacks. There were also a significant number of "short sales positions that were liquidated when the stock market reopened in Israel after the weekend of October 7," Andreani said. That is, speculators bought back the securities at a time when Israeli stocks were in free fall, making a substantial profit.

These economists also took a closer look at the transactions of specific companies listed on the Tel Aviv Stock Exchange. Again, they have seen a sharp increase in speculation around certain banks, such as Leumi, for example. It is this conclusion that the Israel Financial Markets Authority contradicts the most vehemently, assuring that it had not observed any major change in short selling regarding Bank Leumi. She added that to say otherwise was "irresponsible", the BBC said.

For Antoine Andreani, speculation against ISIS remains "very unusual". "There is clearly a peak in the number of short selling between the end of the summer and the beginning of October, which has not been reached since September 2018," the financial markets analyst said.

Legitimate Speculation

But does this mean that all this speculation is the result of stock traders who knew Hamas was going to attack Israel? "That's where you can quickly fall into conspiracy theory," Andreani said.

Indeed, a significant portion of these speculators may have quite legitimately judged that this was the right time to bet against the Israeli stock market. "It has been on a downtrend since November 2021 at least. A context that generally favours speculative downward movements," explains Antoine Andreani. After the Hamas attacks, these speculators thought there was an opportunity. A stock market cynicism that can pay off handsomely, but has nothing to do with any prior knowledge of the horror that was going to befall Israel.

Perhaps we will have to wait for Act II of the work of the two American economists to find out more. They admit that they have only had incomplete data from Finra and that they are "in the process of collecting more" to refine their conclusions. Even if it means getting angrier with the Israeli stock exchange authorities?

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