Lab arbitrage refers to the trade practice of submitting the same gemstone to more than one grading laboratory in pursuit of a more favourable report, and of buying or selling stones according to the spread in grades or origin opinions that different labs produce. It is most acute in diamond and ruby and sapphire markets where small differences in colour, clarity or country-of-origin opinion translate directly into significant price changes.

How it works

The mechanic is straightforward. A wholesaler receives a coloured stone with, say, a Pigeon's Blood call from one major laboratory but a less elevated colour grade from another. They might then buy on the lesser grade and sell on the more flattering one, or simply choose which lab's paper to attach when listing the stone for sale. In diamond, the practice has long centred on the spread between GIA and other laboratories whose grading is widely understood to run a half to a full grade looser, with the same physical stone capable of carrying meaningfully different colour and clarity grades depending on which paper accompanies it.

Coloured stone origin

Origin determination, especially for ruby, sapphire and emerald, is the area where arbitrage most affects retail prices. Burmese ruby and Kashmir sapphire trade at multiples of equivalent material from less premium origins, and the major coloured-stone laboratories occasionally disagree on the country of origin or on whether a stone is unheated. SSEF in Basel, Gubelin in Lucerne, AGL in New York and the GIA Coloured Stone laboratory all publish origin opinions; when one labels a stone Burmese and another Mozambique, or one calls a sapphire Kashmir and another Ceylon, the spread can run into hundreds of thousands of dollars on a single piece. Dealers will sometimes shop the stone, paying multiple submission fees in the hope that one report will land on the higher origin call.

The practice is older than the modern laboratory system. As far back as the early twentieth century, dealers travelled between Paris and London assessors with the same parcel; what is new is the asymmetric way in which retail buyers, who almost never see more than one report, are exposed to the practice.

Treatment status

A second arbitrage runs on heat treatment. The thresholds at which evidence of low-temperature heating is judged sufficient to call a stone heated vary slightly between laboratories. A ruby that one laboratory grades as showing minor residue from heat may emerge from another with an unheated determination, and the price differential between the two reports is substantial. Tucson and Bangkok dealers have historically moved stones between labs on this basis, a fact recognised but rarely discussed in print.

Industry response

The Laboratory Manual Harmonisation Committee, formed in 2009 under the umbrella of CIBJO and including SSEF, Gubelin, AGL, GIT, GRS and the GIA, was an explicit attempt to narrow the spread on terminology and methodology. It has produced harmonised standards on a number of treatment disclosures and on the Pigeon's Blood and Royal Blue colour calls, but origin determination remains an area where differences persist by design, since each laboratory keeps its own reference collection and analytical methods.

The Diamond Standard, GIA's published grading rules and the periodic Rapaport editorials all repeatedly draw attention to the price spread between GIA and other diamond laboratories. The arbitrage is taken seriously enough that some major retailers will accept only GIA papers above a certain stone size or value.

For the buyer

Practical advice for the consumer is straightforward. Buy on the report rather than the stone, but ensure the report is from a laboratory whose standards are well documented and broadly consistent with the trade's central reference. For diamond above 0.30 carat, a GIA report remains the trade benchmark. For coloured stones of significance, an SSEF, Gubelin or AGL report offers the firmest defence against arbitrage; for important pieces, two reports from different premier labs are increasingly the rule rather than the exception. The price paid should reflect the lab whose name is on the cover, since the next buyer will assume nothing more.

The economic effect

From the dealer side, lab arbitrage is a real cost of doing business and a genuine, if unattractive, source of margin. From the consumer side, it is the principal reason that the bare grade printed on a certificate is a less reliable guide to value than the lab name plus the grade. The encyclopaedia entry on certificate premium discusses the resulting price stratification by issuer, and the entry on lab divergence discount addresses the corresponding penalty applied at resale to stones bearing the looser papers.