Markets reporters have a private running joke about how it’s mostly impossible to know what moves stocks, or what might motivate a particular trade.
Sometimes the catalyst looks obvious, like better- or worse-than-expected payrolls data or a surprising earnings report from a bellwether company. But most of the time, market reporting is an XKCD/904-style crapshoot. This is why stocks move “after”, “amid”, and sometimes even “in spite of” various news items, but rarely “because of” them. Markets contain multitudes.
That said, here are some quotations about stock trading from the media this week.
The Telegraph:
Investors with prior knowledge of the Oct 7 Hamas massacre earned at least tens of millions of pounds short-selling Israeli stocks in the days before, according to a report.
😕
Now for a less overconfident interpretation from The Times:
The Israeli authorities are investigating a report by two American law professors that a small number of investors appear to have used prior knowledge of the Hamas attacks to make big stock market profits.
Axios:
Researchers are flagging a suspicious surge in the short-selling of Israeli stocks days before the Hamas attacks of Oct. 7.
and The Guardian:
Israeli authorities are investigating claims by US researchers that some investors may have known in advance about the Hamas plan to attack Israel on 7 October and used that information to earn millions of dollars by short-selling Israeli shares.
Alphaville readers may have already seen the paper this is based on — Trading On Terror? — along with an extremely forceful debunking on Globes, an Israeli news site:
Tel Aviv Stock Exchange EVP head of trade Yaniv Pagot has told “Globes” that the findings of a US research study claiming that investors carried out major short trades on Israeli shares, with an emphasis on Bank Leumi (TASE: LUMI), are inaccurate and divorced from reality . . .
Pagot says, “What the researchers did in the study was to assume through lack of familiarity with the local market that share prices in Israel are quoted in shekels rather than agorot (100 agorot equals a shekel). From this there were many mistakes. In the research they took the increase in the short sales balance on 4,500,000 shares. The researchers estimated that the price per share fell from NIS 734 instead of 734 agorot or NIS 7.34. Therefore they calculate a profit of NIS 3.2 billion (in Leumi shares) when in practice the profit was only NIS 32 million. The researchers magnified the loss per share 100 times. This is a fundamentally mistaken assumption.”
In short: the Tel Aviv exchange said the researchers got their denominations mixed up, and the paper’s estimated profits for the (possible) short position in Bank Leumi was a hundred times bigger than it should have been.
All journalists quickly learn one thing: there are denials that are bluffs, and there are denials that prompt a serious rethinking of one’s life choices. This falls firmly in the second camp.
But, despite this glowing HANDLE WITH CARE sign, the BBC was still happy enough to publish the following on Tuesday afternoon:
Israel says it is investigating claims that some investors may have known of Hamas’s attack on Israel before it took place on 7 October . ..
The study said that 4.43 million new shares in Leumi, Israel’s largest bank, were short-sold between 14 September and 5 October period, yielding profits of 3.2bn shekels ($862mn; £684m).
The BBC seems to have missed the authors’ correction to their paper.
Let’s compare a section of the paper downloaded on December 3 — “20231203 Trading On Terror (Revisions)” — to the one available at pixel time on SSRN — “20231204 Trading on Terror (Monday Morning)”.
From the intros to both:
And later:
And, only in the newer version:
After we posted an initial draft of this article, TASE officials pointed out that the draft described the magnitudes of our findings in units of NIS rather than agorot, the currency in which TASE trades occur. We have revised the draft accordingly. We appreciate TASE’s engagement with our study and welcome further feedback.
Womp womp. So a (possible) profit of $8mn, not $800mn. We’re sure we’ll be seeing some rapid corrections to all those reports.
Both the academics and the journalists messed up their sniff tests here.
But hey . . . maybe there’s more compelling evidence for informed trading in the iShares MSCI Israel ETF? That was another main focus of the paper, as one of its authors told Alphaville Tuesday.
The academics found that unusual levels of short volume in the ETF cropped up on October 2, five days before the attack. Short volumes had previously climbed on April 3, shortly before the original date of the planned attack.
There are problems with the ETF data as well, though. The first is that short volume doesn’t really tell us much, particularly for ETFs, with their complicated semi-regular create and redeem trades. Second, the authors’ short-volume data came only from Finra, though they wrote in the paper that they’re working to get more comprehensive figures from exchanges.
Oh, and both of the dates selected — April 3 and October 2 — happen to be the first trading day of their respective quarters. There wasn’t a comparable spike in Finra-reported short volumes in April and October of previous years, but with such incomplete picture (and such a small ETF) it’s difficult to tell what exactly is being captured. They point to higher utilisation rates of sales available for shorting around that October 2 data.
Short interest is another matter, however. A quick look at data from FactSet shows that short interest as a percentage of outstanding float was highest in early September, a full month before the attacks:
We haven’t been able to track down publicly available borrow costs for EIS, and it’s possible FactSet’s data is comparably incomplete to the paper’s, but it looks like the short interest takes a steep dive before the end of September, well before the attacks.
Another concern the academics flag is an increase in options volumes on US-listed Israeli companies ahead of the October 7 attacks:
. . . this increase in shortdated options can be linked to several block trades in options written on Israeli companies in US markets, suggesting that a small number of actors may have been behind this options trading. As before, we compare to placebo periods and show the increase is unusual.
That could be interesting. But again, just an increase in open interest in a company’s options isn’t great evidence of a conspiracy, or even increased bearishness!
And on closer look, those block trades weren’t quite as war-profiteering as they might sound:
These are trades in SolarEdge Technologies and Teva Pharmaceuticals.
Teva, for its part, has an $11bn market cap and a 30-day average trading volume of 8.3m shares. So three options trades amounting to notionals between 10k and 14k shares don’t seem especially large! And the shares were already falling the week before Hamas attacked. They lost 7.6 per cent in the week before Oct 7, and 8.1 per cent the week after.
SolarEdge Technologies’ market cap is less than half Teva’s, and the authors point to more block trades in its options in the weeks before the attack. But its price fell more before the attacks than it did after. It fell 7.9 per cent between Sept 22 and Oct 6, and just 3.4 per cent between Oct 9 and the options’ expiration on Oct 13.
But sure, we suppose it’s possible that people profited from shorting an Israeli bank and betting against US-listed Israeli companies ahead of the Oct 7 attacks.
Even so, which of the following scenarios seems more likely?
1) Hamas breaks Sharia law ahead of the Oct 7 attack by short-selling Bank Leumi shares (assuming the regulators let them, since the exchange itself said that approval is needed before a large short position is opened); shorting an Israeli equities ETF; and by trading options on US-listed Israeli equities. (ed note: and cared enough about Israeli and US securities law to use an ETF to mask some of their trading ahead of the attacks that they literally GoPro’d)
2) Some investment fund decided in its March and September quarterly investment committee meetings that it wanted less — or possibly more — exposure to Israeli equities. The fund does that trade on the first day of the quarter, which is reflected in EIS’s trading volume and short volume. At the same time, some trader(s) did a bunch of block trades in options on US-listed Israeli equities, while short interest rose in Israeli large-caps at the start of the new quarter.
Ultimately, this one will be up to the regulators to figure out. They do have the ability to investigate these types of trades, and we’d be surprised if they didn’t, even if just to figure out if information is (or isn’t!) spreading ahead of this type of event.
But in the absence of regulator-level information and resources, these types of narratives are very difficult to disprove and become fertile ground for some truly unsavoury conspiracy theories. The authors cited similar academic work on trading that profited after the September 11 attacks, so they are presumably already aware of how quickly these types of narratives can metastasise, even without any evidence of people trading ahead of a tragedy.
