Israeli regulator says no suspicious trading before October 7, but questions remain on US-traded securities

(CNN) — Israel’s top securities regulator said in an updated statement on Tuesday that it has not detected suspicious trading activity on the Israeli stock exchange in the days leading up to the October 7 Hamas attack.

The statement from the Israel Securities Authority (ISA) raises questions about some of the findings in a research paper released Monday that found an unusual spike in bets against Israeli securities just before the attack.

However, that research, from professors at New York University and Columbia University, did not exclusively focus on trading on the Tel Aviv Stock Exchange. Instead, it relied heavily on short selling activity on a fund listed in New York, and Israeli regulators did not review that trading.

The Israel Securities Authority (ISA) said Tuesday that its technology intelligence system, which regularly monitors trading, did not uncover “significant trading abnormalities” that required further investigation prior to the terror attack.

A proactive examination, carried out immediately following October 7, similarly did not “wield any findings” suggesting “suspicious trading activity,” the ISA statement said.

The Israeli regulator said it did reexamine trading several weeks ago after it became aware of forthcoming research. The ISA said its reexamination “did not raise any concerns regarding suspicious activity on the stock exchange in Israel during the relevant days.”

In fact, the ISA said it found that the average short balances for shares traded on the Tel Aviv Stock Exchange declined during the period just before October 7.

By contrast, the NYU and Columbia research found that bets against Israeli securities trades in Tel Aviv “increased dramatically.”

The new research, which has not been peer reviewed, relied heavily on short selling in a popular fund linked to Israeli companies. That fund, the MSCI Israel Exchange Traded Fund (ETF), trades on the New York Stock Exchange, not in Tel Aviv.

ISA noted in its statement that it supervises trading in Israel and its findings on suspicious trading “reflect only trading activity in Israel.”

The US Securities and Exchange Commission told CNN on Monday that it does not confirm the existence or nonexistence of investigations. The Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulator, similarly said it does not comment on whether or not it is conducting an investigation.

The preliminary research, which hasn’t been peer reviewed, found in the days before the Hamas attacks that bets against the value of the MSCI Israel Exchange Traded Fund (ETF) “far exceeded” the short selling activity that took place during the Covid-19 pandemic, the 2014 Israel-Gaza war or even the 2008 financial crisis.

“Our findings suggest that traders informed about the coming attacks profited from these tragic events,” the authors wrote.

Yaniv Pagot, head of trading at the Tel Aviv Stock Exchange, said in an earlier statement to CNN on Tuesday that the paper revealed an “unfamiliarity with the local market” because researchers incorrectly calculated the estimated profit from shorting one particular Israeli company.

The professors previously estimated that bets against Bank Leumi in the days before the October 7 attacks would have generated profits of billions of dollars. A corrected version of the research, sent to CNN on Monday, fixed that mistake and estimated the profits from that trade in the millions of dollars.

“This is a flawed analysis from the outset and there is a lack of understanding of how the local market operates,” Pagot said.

Experts urged regulators to investigate the matter, including by looking at nonpublic market data that researchers did not have access to.

“Clearly, there was something troubling some large investors,” Charles Whitehead, a professor at Cornell Law School, told CNN.

Whitehead noted there is a long history of sophisticated investors trading based on “anticipated, future catastrophic events.” He pointed to traders in the 1980s who shorted the stock of insurance companies that had significant exposure to real estate in San Francisco. Those traders then profited after the region was hit by an earthquake in 1989.

“Of course, that’s quite different from trading based on inside knowledge of terrorist attacks,” Whitehead said. “Whether that was tied to knowledge of terrorist activity requires a better understanding of who was trading and the nature of the trading activity during the lead-up to the Hamas terrorist attack.”

– CNN’s Gayle Harrington and Tamar Michaelis contributed to this report

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