How mom-and-pop investors stumped up a record $3 trillion for Ant IPO

Retail investors bid for a record $3 trillion worth of shares in Ant Group Co Ltd's dual listing, in an unprecedented show of interest from mom-and-pop savers betting on demand for its financial technology services in China.

The world's largest initial public offering (IPO) was split fairly evenly between Shanghai's STAR Market and Hong Kong, raising about $37 billion including the greenshoe option of the Shanghai leg. From retail investors alone, it attracted a bid value the equivalent of Britain's gross domestic product.

Also read: Jack Ma's Ant IPO lures $3 trillion of bids in retail frenzy, worth more than India's GDP

Here's how China and Hong Kong retail investors managed to reach that mammoth figure:

How much retail demand did Ant's IPO generate on the mainland?

Chinese retail bids for Ant shares amounted to $2.8 trillion. That compared with the $19.8 billion the 16-year-old fintech giant raised in the entire Shanghai portion of its IPO, including the greenshoe — or overallotment — option.

Ant in a statement late on Thursday said it will allocate retail investors about 350 million shares, accounting for 18.3 per cent of the Shanghai offering. That means a retail allocation worth 24.1 billion yuan ($3.6 billion) based on the IPO price of 68.8 yuan per share.

Successful bidders must pay for their shares by 4 pm Shanghai time on Monday or else the shares will be allocated to the sale's lead underwriter.

How did mainland retail investors manage to pull together $2.8 trillion?

The retail demand total did not involve payment upfront. Moreover, local rules do not allow banks or brokerages to offer margin financing for IPOs.

Each mainland retail investor was allowed to bid for one unit, or 500 Ant shares, for every 5,000 yuan worth of other Chinese shares already owned, up to 317,000 Ant shares. No cash was needed to bid, and investors allotted shares following a lottery-like draw must have enough money to cover their bid.

The Shanghai portion of Ant's IPO was heavily skewed toward strategic and institutional investors. Retail investors' chance of buying Ant shares was further reduced by the participation of small hedge funds that were not qualified to participate in institutional bidding.

How did retail investors manage to stump up $168 billion in bids for the Hong Kong leg of Ant's IPO?

Unlike China, margin financing is a booming business in Hong Kong. Margin lending backed roughly half of the IPO's Hong Kong retail demand, local media reported, helped by significant liquidity and interest rates as low as 0.4 per cent for short-term credit — roughly 10 days in such cases.

HSBC Holdings PLC said it set aside HK$150 billion ($19 billion) of loans to support retail investor interest in Ant's IPO, while BOC Hong Kong Holdings Ltd said it received over HK$100 billion in margin financing applications.

Some financial firms offered 20 to 30 times leverage to retail clients, banking industry insiders told Reuters.

How do retail investors use margin financing and how does it work for lenders?

Retail investors in Hong Kong borrow heavily as larger bids boost the chance of share allocation, pinning their hopes of benefiting from a debut trading day pop. They pay back the loan soon after listing and pocket the gains.

Margin lending is lucrative for financial firms in Hong Kong as they earn interest on the loans irrespective of whether clients are allocated shares. They also benefit from opening new brokerage trading accounts.

Margin financing money gets locked up at a designated clearance bank. Given strong demand for Ant shares, the actual success rate for Hong Kong retail investors is relatively low, meaning brokers and banks will only have to lend a small portion of the margin financing applied for.