How Does a Diamond Exchange Work?

Overview of a Diamond Exchange

One of Israel's Diamond Trading Floors
A diamond exchange is a central distribution point in the diamond supply chain. A diamond exchange brings in recently mined diamonds for the purposes of sorting and distribution. Rough diamonds are sorted according to a variety of characteristics and are then distributed to jewelry dealers and manufacturers, who cut and polish the diamonds before selling them. The world's largest diamond exchange is located in Ramat Gan, a city near Tel Aviv, Israel. Ramat Gan is home to the Diamond Tower, which contains the world's largest diamond trading floor, as well as several other diamond exchange buildings. Other large diamond exchange centers are New York City and Antwerp, Belgium.

Rough output from diamond mines is purchased by diamond traders operating in a diamond exchange. Rough diamonds are sorted based on characteristics that determine their value, such as shape, size, color and clarity. Since the diamond sorting process is performed by humans, there is a subjective element to it. Sorters operating in a diamond exchange are required to have aptitude and specialized training. They must undergo extensive background checks due to their constant proximity to loose diamonds. Because 142 carats of diamond produce just one ounce of usable stone, diamond exchanges use ultra-sensitive scales to weigh each sorter's package of diamonds before and after sorting.

The second element of a diamond exchange's operations is distribution. After sorting, the sorters working in a diamond exchange sell their packages of stones to dealers, many of whom own cutting and polishing factories. In some cases, certain diamonds may pass through multiple dealers before being sold to the end consumer. The profit a sorter makes is based on the difference between the buying price and selling price of his diamonds. Most sorters earn a profit margin of approximately 10 percent. Israel's diamond exchange sorts approximately 65 percent of the world's rough diamonds; as a result, the sorters working at this exchange have a great deal of leverage over the dealers.

Only certain dealers, known as "sightholders," are allowed to transact with the Israeli diamond exchange. The Israeli sorters host approximately 10 "sights" each year at the Diamond Tower. Sightholders are offered bundles of stones with no guarantees that the stones in these bundles will match the request submitted by the sightholders. Additionally, sightholders can only accept or reject an offer as is, including the asking price. In addition to requiring sightholders to accept the bundles allocated to them (which often include smaller, less valuable stones), the Israeli diamond exchange sorters expect sightholders to undertake and be proficient in marketing and distribution so as to increase general consumer interest in purchasing diamonds. Failure to adequately sell and market diamonds can result in a sightholder being prohibited from engaging in future transactions with the Israeli diamond exchange.