After two days of controversy surrounding a study that purports to show unusually large short sales of Bank Leumi (TASE: LUMI) shares in the weeks preceding the attack by Hamas on southern Israel on October 7, the Israel Securities Authority (ISA) has concluded a comprehensive examination of the affair. The study, published on December 3 by Robert J. Jackson Jr. of the New York University School of Law and Prof. Joshua Mitts of Columbia Law School, argues that the traders in question knew about the impending attack, in the wake of which stocks in Tel Aviv, and Bank Leumi among them, did indeed fall sharply.
Short sellers borrow securities that they expect will fall in price, and sell them. If their expectation is fulfilled, they can later purchase the securities in question more cheaply, return them to the lender, and pocket the difference between the sale and purchase prices.
The ISA’s Investigations, Intelligence and Market Surveillance Department operates an automated intelligence system that monitors trading on the Israeli capital market continually throughout all trading sessions. The ISA says that the system is capable of detecting exceptional events when they happen.
As soon as the war broke out, the Investigations, Intelligence and Market Surveillance Department, at its own initiative, carried out an extensive examination to uncover any suspicious activity that might be connected to the Hamas attack. The examination found no indication of such activity.
But then came the study by the two professors from New York, entitled "Trading on Terror?". Following the study, which was brought to the attention of the ISA several weeks ago, the ISA carried out a further check to examine its findings. "The findings of the examination raised no fear of suspicious activity on the stock exchange in Israel on the relevant days," the ISA says.
"Contrary to what is stated in the study," it added, "the ISA examination found, among other things, that the average short balances in stocks on the Tel Aviv Stock Exchange actually fell in the period leading up to October 7, and that the theoretical profit on the short balance in the stock of Bank Leumi, which opened up about three weeks before the start of the war, was in the tens of millions of shekels, and not three billion shekels."
The ISA also states that "In the nature of things, the Authority deals with supervision of trading in Israel, and so all the findings mentioned reflect what happened in trading in Israel only." The study by Jackson and Mitts also covers the principal Israeli company ETF and options traded in New York.
It should be pointed out that, following an approach from "Globes", the authors of the study admitted that they had erred in their calculation of the profit on the short position built up in Bank Leumi, owing to a misunderstanding of the way prices are quoted on the Tel Aviv Stock Exchange, and in a later draft revised it from NIS 3.2 billion to just NIS 32 million. The ISA’s review of trading on the Tel Aviv Stock Exchange in general and in Bank Leumi shares in particular, however, found nothing suspicious.
Published by Globes, Israel business news - en.globes.co.il - on December 6, 2023.
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