Day: January 6, 2024

An academic research paper claiming people with advance notice of the Oct. 7 Hamas attacks made millions of dollars shorting Israel-related stocks, is being slammed by regulators as wildly inaccurate.

Both the Israel Securities Authority and the Tel Aviv Stock Exchange said on Tuesday that the paper by two prominent American university professors, published Monday and pointing to an alleged spike in short positions in Israeli stocks, is flat-out wrong.

“The average short balances for shares traded on the Tel-Aviv Stock Exchange declined during the period preceding October 7th,”  said a statement from the Israel Securities Authority, or ISA, which regulates markets and investigated the alleged short sales. 

“The findings of this examination did not raise any concerns regarding suspicious activity on the stock exchange in Israel during the relevant days,” the ISA statement said.

The research paper in question, — “Trading on Terror?” — was co-authored by Professor Robert Jackson Jr. of New York University School of Law, a former Securities and Exchange commissioner, and Professor Joshua Mitts of Columbia Law School, who specializes in corporations and securities.

The paper claimed to document a major short-selling spike in dozens of stocks, as well as in the leading exchange-traded fund linked to a basket of Israeli companies, the iShares MSCI Israel ETF.

“Our findings suggest that traders informed about the coming attacks profited from these tragic events,” the professors’ paper stated. “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.” 

The paper was picked up in news articles around the world.

The Tel Aviv Stock Exchange, however, joined the ISA in panning the study as very much off base. “I don’t see in the data something even close to what they wrote in the paper,” said Yaniv Pagot, the exchange’s head of trading, according to Reuters. “There was nothing unusual in short positions in the stock exchange in the two months before the attack.”

The study claimed that it had uncovered a spike in the iShares MSCI Israel ETF, which is traded in the U.S., five days before the attack, based on Financial Industry Regulatory Authority data. The ISA made clear that it did not examine trading outside Israel.

In a short sale, which is a wager that a stock’s price will fall, an investor borrows shares via a broker and immediately sells them, hoping to repay the shares when the price declines, locking in a profit on the difference when it does.

Among other criticisms by regulators was that the two professors confused shekels, the Israeli currency, with agorot, which are one-hundredth of a Shekel’s value, just as a penny is one one-hundredth of a dollar. The flub resulted in ludicrously high estimations by the professors of the alleged profits of the supposed short sellers. 

The professors promptly amended the paper. 

Jackson, who was once viewed as a candidate for chair of the SEC, declined to comment on the record. Mitts did not return phone calls or emails from The Messenger seeking comment. The Tel Aviv Stock Exchange did not respond to an email.

The paper has provoked some criticism from short sellers as well. 

“The rush to blame short sellers in the wake of the 10/7 attacks on Israeli stocks is indicative of a broader misunderstanding of how short selling works,” wrote Gabriel Grego, founder of short-selling firm Quintessential Capital Management in an email. “Such accusations should be approached with a healthy dose of skepticism and a demand for robust evidence.”

Mitts has been a long-time critic of short-selling tactics in his academic research, and both he and, to a lesser degree, Jackson have sparred with prominent short-sellers over the years. They include Carson Block, founder of Muddy Waters Research, a prominent short-selling firm.

Last year, Block published a white paper attacking Mitts’ research. The short seller drilled into Mitt’s work, detailing “material misrepresentations, omissions of fact, lack of academic integrity, and consistently incorrect statements,” according to the abstract. 

Among Block’s many criticisms is that Mitts has served as an advisor to companies that have been targeted by short-sellers, as well as a paid consultant to the Department of Justice, which is reportedly engaged in a wide-ranging investigation of short-selling.

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