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Market Insights

Insider trading suspected before Israel-Hamas clash

Insider trading suspected before Israel-Hamas clash

Regulators investigate bets placed prior to the October attack

In the complex world of stock trading, the intersection of geopolitical events and market movements can reveal intriguing patterns. A recent academic study has brought to light such a pattern, suggesting that certain traders may have capitalised on insider information ahead of the conflict between Israel and Hamas that erupted on October 7th 2023.

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Analysing the trading anomalies:

Just five days prior to the attack (2 October 2023), the volume of short positions (bets that prices will fall) on the iShares MSCI Israel ETF (exchange traded fund) increased significantly.

The ETF that tracks the performance of a number of Israeli companies generally trades in volumes in the low thousands. However five days before the event (2 October) short sales accounted for approximately 99% of trade volume (roughly 227,820 shares).

Source: Blackrock

On October 9th 2023, when trading resumed after the weekend, long positions outnumbered short positions by a similar figure (248,009).

Read our article explaining the difference between long and short positions.

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This shift suggests the possibility of the same investor or group of investors being involved in both the short selling and subsequent buying, with an estimated profit of around $1 million.

In response to the unusual activity, a former commissioner of the US Securities Exchange Commision (SEC), Robert J Jackson Jr and Joshua Mitts of Columbia University published a research paper, reporting the findings of the investigation regarding the events.

The below chart was published in the above-mentioned research paper titled ‘Trading on terror’ which was last revised on 07 December 2023.

Short Volume

Summarising the findings of the report:

  • Options market trends: The study also highlighted unusual activities in the options market, particularly concerning American-traded shares of Israeli companies. There was an eightfold increase in certain options contracts expiring shortly after the event, compared to a negligible change in longer-dated options.
  • Comparative analysis and contextualization: Other periods of tension in the region did not exhibit similar trading patterns, underlining the uniqueness of the October trading activities.
  • Counterarguments and academic response: Critics of the study suggested routine financial activities or market-making responses as alternative explanations.

However, the authors effectively countered these through comprehensive data analysis, emphasising the distinct nature of these trades.

The researchers propose that these trades might have been orchestrated by a small group of individuals, as evidenced by several large options trades in the U.S. markets. The findings in the paper are preliminary and were revised after an Israeli news report indicated that initial profit estimates from the Leumi short trade were overstated due to a quotation error.

Conclusion:

For traders and market analysts, this study offers a critical reminder of the intricate relationship between geopolitical developments and market dynamics.

It underscores the importance of vigilance and ethical trading practices in an ever-connected global market, where information is a powerful asset. As investigations continue, this case may serve as a pivotal example of the potential impact of insider trading on market integrity.

Not investment advice. Past performance does not guarantee or predict future performance.

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Thank you for considering Skilling!

You are about to visit: https://skilling.com/row/ which is operated by Skilling (Seychelles) Ltd, under the Financial Services Authority Seychelles License No: SD042. Before opening an account, please read the terms & conditions and contact our customer support for any questions.

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