Tel Aviv Stock Exchange EVP head of trade Yaniv Pagot has told "Globes" that the findings of a US research study claiming that investors carried out major short trades on Israeli shares, with an emphasis on Bank Leumi (TASE:LUMI), are inaccurate and divorced from reality.
Bank Leumi shares are among the most traded on the TASE and were at the heart of the research 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. They found a sharp and significant rise in short sales of Bank Leumi shares as well as ETFs that track Israeli companies in the days preceding the surprise Hamas attack on October 7.
Pagot says, "What the researchers did in the study was to assume through lack of familiarity with the local market that share prices in Israel are quoted in shekels rather than agorot (100 agorot equals a shekel). From this there were many mistakes. In the research they took the increase in the short sales balance on 4,500,000 shares. The researchers estimated that the price per share fell from NIS 734 instead of 734 agorot or NIS 7.34. Therefore they calculate a profit of NIS 3.2 billion (in Leumi shares) when in practice the profit was only NIS 32 million. The researchers magnified the loss per share 100 times. This is a fundamentally mistaken assumption."
He adds, "There is also a lack of understanding of what happens on the capital market in Tel Aviv. If we assume that somebody carried out a huge short sale in a share, whoever made such a short sell would be completely transparent to the local regulator because he has to sign a share lending agreement with a TASE member. So would somebody from Hamas or a straw company acting on their behalf sign a share lending agreement on the TASE? Even if somebody wants to borrow shares worth NIS 500 million, they need to identify themselves to a bank and take out a credit framework. So the bank need information on who is involved. There are matters like money laundering etc. In other words, there could not be such a scenario. It is regrettable that the researchers did not check with Israeli TASE members and they could have asked how these things work in Israel."
In terms of market cap, Bank Leumi is the second most valuable stock traded on the TASE, worth about NIS 43 billion. The most valuable company is NICE Systems Ltd. (Nasdaq: NICE; TASE:NICE), with a market cap of NIS 44 billion.
The average daily trading volume of Bank Leumi shares on the TASE over the past year has been NIS 114 million - the largest followed by Bank Hapoalim with an average daily trading volume of NIS 92 million. Over the past month the average daily trading volume of Leumi shares has fallen to NIS 91 million. But between September and November the daily average was NIS 112 million. The recent fall shows how high the trading volume of Bank Leumi shares were at the start of the war. The high liquidity would have allowed traders to exercise aggressive short positions with relative ease.
Short positions on Leumi jumped to NIS 422 million on October 5
An examination of TASE data show that on October 8 Bank Leumi's share price slumped 8.8% after the attack the day before. The average daily trading volume in October after the start of the war was NIS 165 million, far higher than the average over the past year.
The US study found that between September 14 and October 5, a short position was built amounting to 4.43 million shares in Bank Leumi. After the Hamas attack, those who built that position reaped profits of NIS 3.2 billion. However, because of the muddling up of shekels with agorot this was really only an estimated profit of NIS 32 million.
But "Globes" examination of TASE data does find that there was a consistent rise in short trading balances on Bank Leumi shares prior to the outbreak of the war. On July 26 there was NIS 285 million in short trade balances on Bank Leumi, which has climbed to NIS 407 million by the last week of September and NIS 422 million on October 5. By November 2, almost a month after the start of the war, the short balances on Leumi's share had fallen to NIS 371 million, and fell further to NIS 355 million on November 23. The rise in short positions ahead of the outbreak of the war and the fall after the start of the war, shed additional light on the matter.
In terms of trading, Bank Leumi's share price tanked after the outbreak of the war. On Sunday October 8, all TASE indices fell sharply. By October 23 Leumi's share price had fallen 22% in 12 trading days from the start of the war, with NIS 6.5 billion shaved off its market cap, which had fallen to NIS 37 billion. Since then Leumi's share price has recovered and as of this morning had gained 16% since October 23, with a market cap of NIS 43 billion.
The choice, to the extent that it was indeed made by the short traders, of Bank Leumi shares was apparently made mainly due to the high liquidity of the shares. When the shares are traded in large volumes, it is possible to receive more offers to short the share, thus building more significant positions.
But at the same time, there are those who see the choice of Bank Leumi shares as having a symbolic dimension as well. It is possible that the parties who acted tried to convey a kind of message in their malicious behavior, since Bank Leumi is not just any bank. This was the bank that was established in London in 1902 to fulfil Herzl's vision of a Jewish state.
Full disclosure: Earlier today "Globes" published the aforementioned research findings as they are after requesting a response from the TASE and the Israel Securities Authority. Subsequently "Globes" received the response of the TASE, which detailed the errors in the research and the article has been revised accordingly.
Published by Globes, Israel business news - en.globes.co.il - on December 4, 2023.
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