Speculative Terrorism: Preparing Capital Markets for Financial Warfare

By: Xander Causwell, Columnist

Photo by: Newsweek

The United States’ financial system is vulnerable to a form of financial warfare campaign in which non-state actors employ kinetic or electronic attacks to manipulate capital markets for profit. In April of 2017, Sergei Wenergold bombed the team bus of German football club Borussia Dortmund in an apparent attempt to kill or maim the players. The day of the attack, Wenergold bought 15,000 ‘put options’ on Borussia stock for €78,000. If the bombing had precipitated a sufficient fall in the team’s share price, Wenergold would have generated almost €3 million in profits.[i] Media reports labelled this action “speculator terrorism,” and Borussia was uniquely vulnerable to such an attack because it is the only football club in Germany to float shares on the stock market.[ii] Wenergold’s speculative attack might be the first of its kind, but academics and pundits have expressed concern about terrorist groups using similar tactics to profit from their attacks since 9/11.[iii] Nefarious actors can potentially exploit capital markets to corrode the integrity of financial systems, while extracting funds to support future operations.

Vulnerable Financial Infrastructure

In the U.S., the financial system constitutes “critical infrastructure” that supports commercial transactions and productivity across the country and around the globe, which makes financial institutions attractive targets for the country’s enemies.[iv] By facilitating the efficient allocation of capital, well-functioning financial markets can maximize productivity, on which the U.S. relies to maintain its global power status. The importance of the financial markets for state power has also led to the rise of financial warfare as a form of conflict distinct from economic warfare. One component of financial warfare comprises strikes against an adversary’s capital market liquidity by undermining its efficiency and participants’ faith in the system.[v] Osama bin Laden deliberately targeted the World Trade Center because he believed it would, in addition to spreading terror, damage the reputation and operability of the US financial system.[vi] A sustained campaign to impact overall availability of liquidity to US financial markets participants could negatively impact commercial productivity, and limit the ability of the U.S. to deploy ‘hard power’ resources in general.

Although capital markets are resilient to large, indiscriminate terror attacks, their efficiency can still be undermined if attacks by malicious actors target individual transactions or groups of transactions in those markets. Transactions such as ‘put options’ and ‘short sells’ are particularly vulnerable to that form of market manipulation. Put options are contracts that give an investor the right to sell a specific amount of a security at a specified price within a specified time frame. If the security price declines, an option holder can sell it above the then-market value (the strike price). Short selling consists of borrowing and then selling an amount of a security for the market price, in anticipation of a subsequent decline in price. If the market price of the security falls, the initial seller can buy the same amount of the security back at the reduced price and return capturing the original strike price but benefiting from the securities’ decline in value. A successful market manipulation scheme involving put options or short selling, depends on driving the price of a security downward. Terrorism and cyber attacks both have demonstrated the ability to reduce the market prices of individual securities.[vii]

Means of Exploiting Capital Markets

Neither the regulatory framework of the US financial system nor the system itself negate the possibility of speculators using kinetic or electronic attacks against firms or properties to drive down the prices of linked securities. Wenergold’s eventual failure and arrest resulted from a combination of misfortune and avoidable mistakes on his part, not infallible financial regulations and enforcement. A more sophisticated group of actors could carry out a successful operation undetected. Already, the perceived vulnerability of some publicly traded entities to cyber-attacks has attracted short sell attempts from legitimate traders.[viii] One such trader could contract out a cyber hit or a physical sabotage against their short sell target to guarantee profit. Assigning attribution in that event would be extraordinarily difficult. For a ‘speculator terrorist’ the attack would be merely instrumental for financial gain; for enemies of the state, the financial gain would be instrumental to funding their respective campaigns.

While there is no active threat of terrorist groups employing this strategy of financial warfare, they have been demonstrating the capabilities necessary to successfully exploit these vulnerabilities in the US financial system. In preparation for a ‘speculative attack’, malicious actors would first have to conceal their securities trading through ‘shell companies’ in the open market, and those firms would have to smuggle the proceeds of the attack across international borders. Terrorist groups are known to have actively utilized shell companies to launder money that they then transfer across national borders.[ix] Groups that primarily engage in terrorism are currently developing cyber warfare expertise, and the US government should anticipate their growing financial expertise as well.[x] The evolution of this threat may be accelerated in groups of non-state actors that receive support from adversarial states, or with the rapidly advancing telecommunications and ‘fintech’ systems.

Pre-empting Speculative Terrorism         

Financial regulators should consider mandating stock exchanges maintain ‘single-stock circuit breakers’ that respond to targeted cyber or kinetic attacks. The current circuit breaker system halts trading for a period of minutes on individual securities if their respective prices fluctuate outside of pre-set bounds.[xi] Expanding the mechanism’s application to halt trading on securities linked to assets affected by targeted attacks would disrupt an attacker’s ability to complete a put option or short sell. The trading halt should be long enough to allow special investigators to analyze any suspicious speculation on the affected security. The mere existence of this instrument would serve as a deterrent to speculative attacks since it minimizes the expectation of profit, and the consequently rare application would not significantly disrupt legitimate trading. Since such attacks would be guided by expected payoffs, reducing those expectations would decrease the probability of speculator attacks toward zero, thus protecting the integrity of capital markets.







[i] Philip Oltermann, “Dortmund Attack: Man Arrested on Suspicion of Share-Dealing Plot | World News,” The Guardian Online. April 21, 2017, https://www.theguardian.com/football/2017/apr/21/dortmund-bus-attack-suspect-arrested-as-police-allege-share-dealing-plot.

[ii] Tom Smith, “Terrorism for Financial Gain Is a Real Threat – but It’s Also Nothing We Haven’t Seen before,” The Independent, April 23 2017. http://www.independent.co.uk/voices/dortmund-bus-attack-terrorism-financial-gain-stock-market-fear-a7698001.html.

[iii] Thomas Baumert, “Do Terrorists Play the Market? Or Can Their Attacks Serve as a Source of Financing for Terrorism?,” Policing: A Journal of Policy and Practice, Volume 2, Issue 4, 1 January 2008: 434–440.

[iv]USA, Department of Homeland Security, National Infrastructure Protection Plan, Financial Services Sector-Specific Plan, (Washington DC, 2015), https://www.dhs.gov/sites/default/files/publications/nipp-ssp-financial-services-2015-508.pdf.

[v] David J. Katz, “Waging Financial War,” Parameters 43 (4), 2013: 77.

[vi] Thomas Baumert, “Do Terrorists Play the Market?”

[vii] R. B. Johnston & O. M. Nedelescu, “The Impact of Terrorism on Financial Markets,” Journal of Financial Crime, 13(1), 7-25; James Titcomb, “Cyber Attacks Knock Millions Off FTSE Share Prices,” The Telegraph, April 21, 2017, https://www.telegraph.co.uk/technology/2017/04/12/cyber-attacks-knock-millions-ftse-share-prices/.

[viii] Jeff John Roberts, “A New Investment Strategy Is Based on Short Selling Cyber Victims. Is This a Good Idea?,” Fortune, September 10, 2016, http://fortune.com/2016/09/10/short-selling-cyber/.

[ix] Richard V. Rodriguez,”Economic Terror: Market Manifestations of Terror Attacks,” American University National Security Law Brief, Vol. 1, No. 1, 2011.

[x] Levi Maxey, “When Terrorists Learn How to Hack.” The Cipher Brief. December 3, 2017, https://www.thecipherbrief.com/article/tech/terrorists-learn-hack.

[xi] USA, US Securities and Exchange Commission, Investor Alerts and Bulletins, Investor Bulletin: New Stock-by-Stock Circuit Breakers, (Washington DC, 2011), https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-circuitbreakershtm.html.

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