A troubling theory about traders profiting from Hamas’ attack on Israel drew much attention. Why it may not be so simple.

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 bets were placed against Israeli stocks in October and millions were made. after Hamas attacked Israel.

The allegations published in the journal Social Science Research Network have not yet been peer-reviewed. But they attracted a lot of attention, in part because, as the authors acknowledge in their article, there is no way to know whether the exchanges were made by people connected to Hamas or people connected to Israel or neither.

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

"Our findings suggest that merchants informed about the upcoming attacks benefited from these tragic events," they wrote, referring to the October 7 attacks.

The day after the attacks, Israel's main stock market fell 8%.

But based on the data available to researchers and the public, it's hard to say whether it happened as they theorized.

"There is not enough hard evidence to definitively say what happened," said JJ Kinahan, who has been involved in options trading since 1985. He is 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 transaction, it's hard to say 'this happened,'" he said.

Israel's stock exchange rejected the claims. that there was unusual commercial activity before the Hamas attacks. According to Israeli officials, around 1,200 people in Israel were killed and more than 200 were taken hostage. The ensuing 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 didn't help that in an earlier version of the report, the authors exaggerated 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 unknowns could have made profits of about $860 million 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 in early October, some traders began betting that Israeli stocks were going to fall. They did this by taking short positions, stock market trades in which a person or company borrows a stock from another person and then sells it. If the price of that asset falls below the asking price, they can buy it back for a profit.

For example, Jackson and Mitts said that on October 2 there was an unusual increase in short positions taken against the MSCI Israel Exchange-Traded Fund, a collection of 117 different Israeli stocks that traders can buy or sell in the same way as they would do. an individual action.

"We documented a significant increase in short selling in major Israeli company ETFs days before the October 7 Hamas attack," they wrote.

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

Kinahan said it's hard to know if that's really what merchants expected. One reason is that traders often use options to hedge their market bets.

It might seem sinister that someone shorted some Israeli stocks days before the Hamas attack, but Kinahan said it's equally possible that traders actually made a much bigger bet that Israel's economy would prosper and they 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 market transaction that this is the flip side of," he said.

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

News reports said Hamas initially planned to attack Israel in early April, and the authors said they found signs of similar short actions at the time. They said that could show that someone was prepared to implement the same business 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 start and there is a lack of understanding of how the local market operates. “It is unfortunate that the investigators did not consult with members of the Israeli stock exchange, 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 higher levels than usual compared to typical trading, most of the stock itself is trading lightly. That means fluctuations in those stocks may appear larger than they really are.

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

After the Sept. 11, 2001, terrorist attacks, 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 nearly three years investigating the matter and said in 2004 that it “did not develop any evidence to suggest that anyone who had prior knowledge of the 9/11 attacks traded based on that information.”

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

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