Hamas and those funding it may have used equity markets to generate cash ahead of the group's assault on Israel on Oct. 7, according to a research paper.

In a paper entitled "Trading on Terror?" published in the Social Science Research Network journal, law professors Robert J. Jackson, Jr. of NYU and Joshua Mitts of Columbia identified outlier trades against the overall Israeli market days before the attack.

"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," they said.

The authors documented "a significant spike in short selling" in iShares MSCI Israel ETF (NYSEARCA:EIS) days before the 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 COVID19 pandemic," they said.

Short volume on EIS for Oct. 2 was above the upper 99%-quantile out of 3,570 trading days since 2009, the paper detailed, while the short ratio was above the 99.5%-quantile.

Extreme short selling was also seen in individual issues.

"For one company alone (Bank Leumi), 4.43 million new shares sold short over the September 14 to October 5 period yielded profits (or approximates avoided losses) of 3.2 billion NIS on that additional short selling," the authors said.

In addition, open interest in options expiring Oct. 13 increased "substantially" right before the attacks, Jackson and Mitts stated.

"We show that this increase in short-dated options can be linked to several block trades in options written on Israeli companies in U.S."

They also said that in "light of the limits of the data available to us, we are unable to link particular market participants to the preattack developments we see in securities markets - to say nothing of the underlying sources of information that produced the trades we study."

But add that both "FINRA and the U.S. Securities and Exchange Commission (SEC) have access to nonpublic data that could be helpful for investigators interested in understanding why, and how, financial markets may have anticipated the events of October 7."