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New technology adds sparkle to diamond trade

Ariel Jerozolimski | Bloomberg | Getty Images

The most precious gem will soon join the ranks of gold and other commodities on trading screens, with the world's first exchange in physically settled diamonds set to launch in Singapore in September.

The Singapore Diamond Investment Exchange (SDiX) is bringing exchange technology to the diamond market in an attempt to create a shiny new asset class for the financial community without the need to go through private diamond brokers who have little or no regulatory oversight.

"The diamond industry primarily trades though locations where people meet and discuss price transactions ... By analogy of any stock or commodity exchange, what you see today is business to business (B2B) inventories and people trading over the counter," Alain Vandenborre, founder and chairman of Singapore Diamond Investment Exchange (SDiX) told CNBC.

But that could be a thing of the past if the SDiX is successful.

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The exchange, which counts billionaire Jim Rogers as an angel investor, assembles baskets of lab-graded diamonds as well as single stones for accredited traders and investors. The diamonds are priced at the equilibrium of market supply and demand at any particular time; supply of the stones will be initially provided by India's Bharat Diamond Bourse.

The exchange's features include a real-time price discovery mechanism and a trading engine that can match more than 500,000 transactions per second. The platform is reportedly the first of its kind globally and differs from existing systems like the Singapore Diamond Exchange, which only allows individual investors to buy diamonds, not trade them.

"This will be the first global commodity exchange concentrated on one asset but trading globally," Vandenborre said.

A tough market

Buying diamonds can be an incredibly volatile trade without the right environment, experts say.

"You need to look for a market with liquidity. You don't want to buy these big stones that you need a millionaire to sell to. You want something with price transparency; once those things are in place then diamonds are in fact, a good investment," Martin Rapaport, chairman of Rapaport Group told CNBC in March.

Diamond prices have had a chaotic few years, with polished stones tumbling nearly 9 percent in 2014, according to the Rapaport's Diamond Index, a widely followed industry benchmark.

Moreover, severe price markups add to the risk. A stone purchased wholesale and sold at a retail market can increase in price by up to 200 percent on average, according to widespread estimates.

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"Around $22 billion worth of diamonds are sold at wholesale prices every year, but once financial traders have the confidence that they're trading in a regulated exchange, that $22 billion could easily top $100 billion in a matter of two years," Vandenborre said.

Ensuring efficiency

The launch of the new exchange comes as major markets across Asia step up their game to modernize technology systems.

The Singapore stock exchange (SGX) plans to splash $15 million on infrastructure improvements following two power outages at the end of 2014 that stopped trade for three hours. Meanwhile, Australia's ASX exchange began an overhaul of its trading systems in February this year, switching from Nasdaq OMX to Swedish firm Cinnober.

But SDiX is confident with its technology, which it calls "cutting edge." It intends to extend its platform with new instruments like futures and diamond derivatives in the near future, the firm said in a statement.