Rapaport Mystery

[kevinng]

I have been reading and thinking about how diamonds are priced. I am aware that in all illiquid markets, pricing tends to be inefficient, based on imperfect information.

No matter how imperfect the information is, the basis is mostly derived from the market. For instance, for real estate, each house is unique. However there is some transparency in the price of transacted property, like the price of the last house being sold in the neighbourhood. Then, on closer inspection of the house/property, and adjusting for the unique characteristics and gut feel, on offers or accepts a price. In fact, the unique characteristics of real estates out-number that of a diamond... and yet the pricing is far more transparent.

So, it seems very strange that Mr Rapaport can be the sole person determining the price of diamonds in the market. People make adjustments based on the prices he puts on those reports. Does that not mean that he can go long on certain grades and raise the prices on the reports... or go short on certain grades and lower the prices on the reports? Wouldn''t he be making massive arbitrage profits out of this monopoly of information?

What is his basis for setting those rather high prices? Why are industry players following the information ''blindly'' (after adjusting for quality and other measurable factors, of course)? What is the value of those reports? Why can''t another party come up with an alternative price list? Afterall, Bloomberg exists very nicely next to Reuters, don''t they? Shouldn''t there be some sort of check/balance?

 

[Ronen]

My dera friend,

From what i have heard the Rapaport list is owned by De Beers.

Cheers
R

 

[kevinng]

I see... Unfortunately, that makes sense.

 

[Garry H (Cut Nut)]

Rapaport does his best, but gets lots of pressure from all sides.

he is in no way related to De Beers.
Read articles on www.diamonds.net news site and you will find he agrees and disagrees at various times with their approaches. He is strongly agin them at the moment - wants more free rough to go through Diamdel for non sight holder distribution.

 

[valeria101]

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On 7/5/2004 3:42:40 AM kevinng wrote:



I am aware that in all illiquid markets, pricing tends to be inefficient, based on imperfect information.

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I wouls say that about the resale and, to some degree, retail scenarios,... but is Rap retail ? To put it otherwise, what do yu mean by inefficient pricing ?

 

[kevinng]

Thanks Gary. I getting more and more curious about the industry. Can you recommend a couple of good books about the industry... and how diamonds are priced?

Thanks.

 

[Garry H (Cut Nut)]

no - they shoot you for that

The books would be redundant - the market changes
Rap just started a business 25 years ago to sell info about the market. Now he is as much a part of the market that it is arguable that he has lost objectivity.
But he is a really smart economist dude and has come up with an auction process to show the lowested traded prices and cheapest offered goods. The Rap list is not a retail list - it is a list at which every sane dealer would sell the very best stone for to their worst enemy. It is a dealer to dealer list, and retail buyers should be careful with the info.

Pricescope selling lists and search by cut quality will be far more use to you because they too are real stones on real markewts.

 

[valeria101]

I didn't think Rap is a retail list - but since the retail diamond business makes a clasic example of imperfect information game, I thought I'd ask. Dealer to dealer... auction process... this sounds familiar arguments for efficient pricing - at least as economists would talk about it.

But 25 years of micro pricing data !!! That's one database to kill for. Is that the only way ?

 

[oldminer]

Please.... Rapaport does NOT set prices at all. There are no diamonds trading in the wholesale market for 100% Rapaport prices. There are few diamonds of the same weight, color and clarity trading for the same discount below a Rap price, either. WHy's that? Because nearly every diamond or group of diamonds is somewhat different. There is flourescence, cut quality, girdle thickness, symmetry, polish, culet size, knotting, graining, surface graining, open versus closed inclusions...and on and on... The trading of diamonds is done in a manner where freedom and bickering over tiny details is the rule.

Rapaport gives the trade a grid of related prices which assist dealers to work based on "percent off" codes, but it does not dictate the actual transaction price dealers agree to pay.

Retailers, on the other hand, may indicate that Rapaport is "wholesale" or "retail", but only the uninformed believe it. Just because someone authoritative says it is so, does not make it so. Be a little skeptical. Diamond dealers are great game players. Every deal has nuances. It wouldn't be entertaining without some element of greed, power, oneupmanship, or bs.

So, don't center on Rapaport as being responsible for prices or for the market value of diamonds. He has done a superb job of publishing and marketing his products, but don't believe for a minute he actually and trulyt controls prices. Only those with a false understanding believe Rapaport controls
pricing of diamonds. Whoever tells you Rapaport controls the price, look out for your wallet and fingers.

 

[Garry H (Cut Nut)]

No need to kill.

just fork out $500 a year and it is all yours

 

[WinkHPD]

bOTH oLD mINER AND gARY MAKE EXCELLENT POINTS.

Oops, darn caps lock...

Also, it should be noted that there are other price lists out there that do not reflect the higher prices that Rap lists so that the informed can apply the appropriate discount when buying. These lists also cost several hundred per year and are much better protected, meaning that they are not handed out to the public by every dealer trying to show you how he is letting you "in on the trade secrets". (That is one thing that many dealers love about the Rap Sheet, it has a nice but hidden discount built into it so that a dealer can show it to a retail client, sell at or close to the Rap sheet and make a profit.)

Rap is indeed quite at odds with DeBeers at this time and is strongly taking them to task over the SOC program and especially with Diamdel, an organization through which DeBeers releases some rough to non sight holders by virtue of granting sites to Diamdel to sell to them. He is furious that Diamdel will go onto the open market and buy up certain sizes and qualities of rough, in competition with the very dealers it is supposed to be supporting.

Some, including at least one editor for one of the other price lists, are also upset with Rap for not reflecting the new reality in the market place that prices are going up much more rapidly at the rough cost level than Rap is reporting. They are asking out loud, why?

I repeat my statement that these are interesting times in the diamond world, and that price increases are coming.

Gary, you just spent some time in Antwerp, what did you see while you were there?

Wink

 

[kevinng]

Thank you all for all the information. Especially when most of these information are not published, and there aren't many people talking about these things where I come from.

Although all the points raised are good arguments, I would like to raise a couple of more points for debate... Just to gain more insight, if nothing else.

Granted that Rapaport does not SET prices. Each diamond is unique, and there are a lot of factors to consider when pricing a diamond. However, since people do use Rapaport as a reference, the report is rather influential. Dealers/traders have a lot of micro information to deal with when pricing the diamond, so I postulate that they will tend to leave the macro market forces type information to someone else. So, it appears that the Rapaport report has become the leading report for this purpose.

I do not completely agree that dealers/traders are above the Rap report. Maybe some dealers are sophisticated and tuned into the diamond market. However, a lot of small timers still pull out the Rap sheet whenever they are asked questions about the price of diamonds. My gemologist pulled out his Rap sheet when I asked him how much he thinks my diamond is worth.

Do correct me if I am wrong. I am here to learn.

To illustrate my point... whenever the Dow Jones move in a certain direction, the Singapore market tends to move too. Most of the companies that have absolutely nothing to do with the US will also tend to move with the trend. This is because the US is the largest economy in the world and we tend to view the Dow as an indicator of the global macroeconomic condition.

Coming back to diamonds... Ultimately, I am not questioning Rapaport's intent nor his qualification. With the amout of money he collects for each report, he can afford to hire good economists if he so wishes. However, I would like to know the basis for his reports? Apparently, from the replies above, there is much subjectivity in the reports. Can he really choose not to reflect the shortage in supply in the price reports? Can he also be pushed around by big players in the market? Why can't the report be based on some measurable index, rather than Mr Rapaport's judgement? Maybe someone likes the fact that he appears independent, and yet he can be pushed around... at least sometimes?

I am sorry if I am asking rather obvious questions. I am curious, but I am completely new to this. Prior to buying my proposal diamond, I was almost clueless about diamonds, except for the documentary I saw about DeBeers a long time ago. After learning a little about how to pick a good diamond as a consumer, I gues one thing led to another. All references or links to related material are welcomed.

 

[kevinng]

And... no. I never once thought that Rapaport SET prices. Neither does any information providers like Reuters or Bloomberg.

Rapaport publishes information that influence prices. I am just asking how does he do it?

Hypothetically, imagine you are living on a street with many houses, all the same size but different quality. A couple of houses have changed hands in the last quarter for different prices. One house has a broken roof, bad piping and sold for $70,000. Another one is perfectly fine, but the last family in it was murdered. Le's say that one sold for $75,000. Another one is in perfect condition, with designer furnishing and fully renovated. That went for $100,000... and so on.

So, going by Rapaport report, the price for houses on that street should be $100,000? If a major develop goes up to him and told him to lower the reported price because he intends to buy up the neighbourhood... what happens? If Rapaport thinks that the housing market is going to move up because of a shortfall in suppy in housing, will he raise the published price to say $105,000? How does he do it?

 

[Garry H (Cut Nut)]

Rap runs the bonded shipping business to and GIA for Antwerp, Israel and Bombay. this means he sees the goods and presumably the insured values etc on a large volume of stones.

He also runs one of the largest trading B2B sites.

He also acts as a broker.

And finally his company is an active trader.

He is not short on info

 

[bshor]

By the way, a monopoly is not necessarily inefficient in economics, as long as there is a credible threat of entry.

In other words, if Rap is inefficiently pricing diamonds, another competitor (Pricescope?) could enter the market with 'better' (more accurate) prices. If you're a dealer who buys (and sells) diamonds, why should you subscribe to an inaccurate list that costs you many $$?

This will cut down on the arbitrage opportunities. Do you really think any potential arb opportunities are going to be sustainable?

What a fun topic!

 

[oldminer]

In a way I agree that Pricescope is doing an excellent job of providing actual lowest retail asking prices of diamonds. The prices Rap uses are high or highest possible "wholesale" asking prices where further reductions are quite likely and extemely variable. The definition of "wholesale" when it comes to Rapaport is not even well defined. The asking prices on Pricescope, while not said to be "wholesale", are very accurate in showing lowest possible retail with extremely little variability possible. Truly these prices are right at wholesale for many B&M retailers.

I have kept my Rapaport subscription going and also my Guide subscription, too. They seem like trusted tools and we find them useful. Admittedly, we also now use the Pricescope search for comparables. I think in a court of law, the results of a Pricescope search could have a higher degree of credibility than reliance on Rapaport or even the Guide when it comes to diamond prices. Of course, it depends on what level of the market your interest lies in. Circumstances can be incredibly complex, so this simple opinion might be invalid in some cases. In general, I think Pricescope is one of the major positive changes in diamond marketing in the past 50 years.

 

[WinkHPD]

Well said!

 

[kevinng]

Yes, I think pricescope prices are more reliable, especially for the consumer. It is based on asking/sale price of actual diamonds being traded.

To use the Rap sheet, there are all these adjustments you have to make, which requires detailed knowledge of a diamond. The better informed you are, the better the adjustments you make.

From my limited understanding, there are 2 levels of adjustments we have to make to the Rap sheets.
1. Adjustments made based on the unique characteristics of the diamond.
2. Adjustments made based on how right/realistic we think the Rap sheets are.

The first requires skill, the second requires knowledge of the market.

You are right to say that Rap must get it right most of the time, else people won't be using the Rap sheets. However, there's nothing to stop him from getting it a little wrong sometimes... if it serves his interests. Sure, there are other sources of information like Pricescope. However, many of the small-timers are not so tuned into the market.

Personally, I am not for or against a monopoly or cartel in the industry. It is a luxury industry which serves people with excess cash. If you cannot afford it, you shouldn't be buying a diamond anyway. So, there shouldn't be a significant impact on the welfare of the economy if we price a diamond too high.

However, I'm taking it on as an educated consumer, to find out more about these things... to find out how reliable these price sheets are... and how much profit is the vendor making off me for his services. It's all very interesting, don't you think? Thanks to PS, I need not take any more BS!

 

[kevinng]

Oh... just because Pricescope appears to be more reliable and user-friendly for now does not mean that Rap will be pushed aside. Rap is so firmly rooted in the industry that it will take a long time to uproot it.

One cannot gaurantee that pricescope will remain the way it is for the next 10 years.

Also, Rap reports are being used around the world. Diamond dealers in the deepest/darkest parts of the world know what you are talking about when you use Rap.

There are many products that end up the loser, even when they are superior. Remember those betamax video tapes that didn't quite take off? How about the Mac vs PC?

But who knows about these things.... Perhaps pricescope reports will replace Rap reports one day.

 

[bshor]

I do the think the market is not entirely liquid. If you want to sell your diamond (as a small timer), relatively quickly, you would probably take a big hit on price. The same is not true of the housing market, where the market for used homes is relatively liquid, despite the large amounts of capital involved.

The market also values things in a funny way. It seems there is more of a premium on clarity jumps than color jumps (or am I wrong about this), or quality cuts, when most people, at least in these forums, seem to value cut above all, then color, then clarity.

The other marker of illiquidity is the 'step-wise' jumps at critical junctures of carat weights. Eg, there's a big 'lumpy' jump in prices at 1.0 carats, 1.5, 2.0, etc, when it should be smoothly increasing, even in a nonlinear fashion (to account for the rareness of larger stones).

 

[kevinng]

Oh... I don't think the lumpy jumps across carat weights like 1ct, 1.5ct, 2ct can be used as an indication of illiquidity.

Granted that diamonds are not exactly very liquid, but the correct measure if illiquidity is the spread of prices across the same 'class'/'grade' of products.

Consumers are strange animals. They have this perception that diamonds above the 'magic' weights like 1ct, are superior to those below. I think the lumpy jumps indicate that the market perceive diamonds below/above the 'magic' weights as different products. The markets are segmented.

 

[valeria101]

Date: 7/7/2004 11:21:35 PM
Author: bshor
I do the think the market is not entirely liquid. If you want to sell your diamond (as a small timer), relatively quickly, you would probably take a big hit on price.

How about asymmetric information (lemmons model) ? I would not be the first to claim that this fits diamond retail rather well. The housing market does not have comparable grading institutions to keep the valuable property of transactions in place.

 

[bshor]

A fellow economics enthusiast! You mean Akerlof''s Lemons Model of used cars?

 

[mdx]

Kevin

The rap sheets are essentially reference points for dealer-to-dealer negotiations and should not be seen as a price list.
Diamond prices on a wholesale level are essentially determined by cost of rough, factoring in the time period for the material to flow through the manufacturing process into the wholesale then retail markets.

The trade tracks the movement by monitoring shortening discounts against current rap prices. Shortening discounts are also caused by demand for specific material or shortages of specific rough

At a point in time I think only known by Rappaport the price sheet adjusts and discounts can fall back to normal levels. but not always.
Raprices are published every Friday and will highlight any changes.
De Beers rough sights are sold are every 5 weeks with contents of these boxes effecting supply and therefore demand prices.
Predicting foreword prices from here is a complex equations used to determine inventory value.
Inventory value in turn determines the negotiation parameters for BtoB transactions.
This a simplified example of some pricing factors and the use of rap sheets in the market and hopefully illustrates that it is foolish for consumers or retailers to try use it as a price list or guide.

Johan

 

[valeria101]

Date: 4/29/2005 1:412 PM
Author: bshor
A fellow economics enthusiast! You mean Akerlof's Lemons Model of used cars?

Yes, that one. It has been used in the classic form to describe diamond retail already. What I had in mind is a dynamic version that allows to endogenize the creation of common knowledge between buyer and seller. So that something like our dear certification labs (or Pricescope for that matter) gets to play too.

 

[RockDoc]

RE: Rap


The Rapaport Sheet and The Guide are PRICE GUIDES.... As such the price guide really doesn''t sell or buy diamonds.

Pricescope is a price LIST....as well as some other databases that only post actual starting Prices. However, it still takes a lot of industry knowledge to use these lists.

As David wrote there are many factors that are necessary to know to know why one diamond may be priced less than another. This the Price Lists or Guides don''t necessarily show.

Depending on the integrity of the person selling, listed prices, can be misleading.

As to stones selling for 100% of Rap''s values, This really isn''t so. There are several sellers/ cutters that set thier wholesale prices above the price on Rap. Most of these are branded cut stones.

David is very correct that there are plenty of uninformed consumers as well as dealers who don''t understand the importance of the adjustment discount percentage and how it really relates to prices asked, or charged both at the dealer level and the consumer level.


My main "objection" to Rap''s list is that he really isn''t an independent source. Since he buys and sellls as he is a broker, he has the potential ability to raise and lower prices on his list where potentially it could benefit his prices on stones he is brokering.

Acutally, he also publishes a list of diamonds that he is brokering, that is most likely a lot more reliable bases for analyzing price/value of diamonds that his regular publiscation.


Rockdoc
.