IS PROFITING FROM TRADING WITH ADVANCE NOTICE OF THE HAMAS ATTACK ON ISRAEL INSIDER TRADING OR PROVIDING FINANCIAL SUPPORT TO A TERRORIST ORGANIZATION?

 

A paper published this week has made and documented allegations of a surge in short selling immediately prior to the October 7 terrorist attack on Israel by Hamas. What is the liability, if proven by the evidence, of both traders and their client, for not only Insider Trading, but Providing financial Support for a terrorist organization? Dp we really have such amoral stockbrokers on Wall Street or elsewhere that would engage in such conduct? If so, terrorist financing and money laundering charges would seem appropriate, with enhanced penalties for convictions at sentencing. 

These issues require immediate investigation by the Securities & Exchange Commision, as well as America's Federal law enforcement agencies and its intelligence community. Read the extract below for more details.

"Recent scholarship shows that informed traders increasingly disguise trades in economically linked securities such as exchange-traded funds (ETFs). Linking that work to longstanding literature on financial markets’ reactions to military conflict, we document a significant spike in short selling in the principal Israeli-company ETF days before the October 7 Hamas attack. The short selling that day far exceeded the short selling that occurred during numerous other periods of crisis, including the recession following the financial crisis, the 2014 Israel-Gaza war, and the COVID-19 pandemic. Similarly, we identify increases in short selling before the attack in dozens of Israeli companies traded in Tel Aviv. For one Israeli company alone, 4.43 million new shares sold short over the September 14 to October 5 period yielded profits (or avoided losses) of 3.2 billion NIS on that additional short selling. Although we see no aggregate increase in shorting of Israeli companies on U.S. exchanges, we do identify a sharp and unusual increase, just before the attacks, in trading in risky short-dated options on these companies expiring just after the attacks. We identify similar patterns in the Israeli ETF at times when it was reported that Hamas was planning to execute a similar attack as in October. Our findings suggest that traders informed about the coming attacks profited from these tragic events, and consistent with prior literature we show that trading of this kind occurs in gaps in U.S. and international enforcement of legal prohibitions on informed trading. We contribute to the growing literature on trading related to geopolitical events and offer suggestions for policymakers concerned about profitable trading on the basis of information about coming military conflict."

Keywords: law,finance,trading,terrorism,securities,financing

JEL Classification: G14,K22

Suggested Citation:

Jackson, Jr., Robert J. and Mitts, Joshua, Trading on Terror? (December 3, 2023). Available at SSRN: https://ssrn.com/abstract=4652027