The 133-year-old New York Mercantile Exchange, the largest physical commodity futures exchange in the world, is gearing up to go public. Will it be one of the hot stocks in 2006? It could well be, judging from the recent experience of some of its rival exchanges.

On November 16, Intercontinental Exchange (ICE $34) went public at $26 per share. ICE is the no. 1 competitor to NYMEX, trading energy futures primarily in Europe. The offering was originally expected to be priced at $20 or less, but demand was such that the issuing price was raised. In the ensuing two weeks, the stock rose as high as $44, for a gain of nearly 70%. Since then cooler heads have prevailed, but the excitement about the company’s prospects is intense.

Similar enthusiasm attends the opportunity to buy the stock of the New York Stock Exchange. Next week members will likely approve a deal whereby the exchange will merge with Archipelago (AX $58), an electronic trading firm and, consequently, become a publicly owned enterprise.

Among those watching the proceedings with keen interest will be James Newsome, the president of the New York Mercantile Exchange, which is heading down a similar path. Mr. Newsome, who was head of the oversight Commodity Futures Trading Commission until August of last year, has parachuted into the midst of a significant transformation in the venerable exchange.

In 2000 the NYMEX demutualized, meaning it became a corporation whose shareholders were its former seat holders. More recently, the firm agreed to sell a 10% stake to private equity investor General Atlantic for $135 million, with the expectation that shortly thereafter the exchange would have an initial public offering of its stock.

Looking over the trading floor of the NYMEX, one sees traders in brightly colored jackets waving and hollering to each other like men possessed, and bits of paper signifying binding contracts sail through the air into trading rings. It is difficult to imagine that investors will perceive this company to be brilliantly positioned for growth in our electronic age.

However, such an expectation is easier to come by after reviewing the recent performance of some of its rivals. The Chicago Mercantile Exchange (CME), which went public in December 2002 at $35 per share, now trades at $369. The Chicago Board of Trade (BOT) came public on October 18 of this year at $54 and now sells at $96.

How can the trading of futures on cattle prices, the S&P Index, copper, oil, and wheat be so appealing to investors? Richard Repetto of Sandler O’Neill says, “Futures is a secular growth area because of risk management and speculation.” Indeed, businesses around the world have fastened onto futures markets as a place to hedge against adversity.

Manufacturers can buy futures on the NYMEX, for instance, to hedge against copper or aluminum prices going against them, or refiners can buy products that guard against the spreads between various petroleum products moving outside historic norms. Today’s NYMEX is the result of the 1994 merger of the old Mercantile Exchange (oil futures) with the former Commodity Exchange, which trades gold and other metals futures and accounts for about 30% of overall revenues.

Though the NYMEX holds a commanding position in certain of its products (especially crude oil futures), the exchange’s old-fashioned open-outcry trading is considered by some an impediment to growth. “Investors will take a critical look at how fast they can go electronic,” Mr. Repetto says. Mr. Newsome responds that “we understand the long-term trend towards screen-based trading” and points to some initiatives that have moved the exchange in that direction. At present about 30% of all trading is done electronically.

Moving to electronic trading is a touchy business for the NYMEX, as it is for the NYSE. In both cases the current shareholders and traders are one in the same; they are extremely anxious not to lose their livelihood and trading advantage to a black box.

Interestingly, in the so-called “physical markets” – meaning commodities – open outcry is still the norm. Mr. Newsome claims the method is necessary because of the complexity of some of the products being traded on the NYMEX. While the electronic competitors are mainly trading current or one-month-out contracts, the NYMEX deals in contracts with durations of up to several years, and sometimes trades quite intricate spread products. So far, he suggests, no one has been able to devise an electronic platform for such transactions.

Certainly there is a demand for more electronic activity. The hedge funds, among others, are particularly keen on the added privacy available from screen trading. These investors normally account for less than 10% of NYMEX trading; industry participants are by far the largest customers, doing some 60% of the trades.

The news is not all grim for those caught in this migration. According to Mr. Repetto, a switch to screen trading has been shown to increase volume, and, depending on how fees are handled, it is more profitable.

Meanwhile, the NYMEX, like the New York Stock Exchange, is adding new products and looking to enter new markets. For instance, the company is pursuing a joint effort with the Russian government to establish a Russian sour crude benchmark. At the moment, crude price standards are based on West Texas or Brent sweet crude even though sour crude accounts for a bigger share of the overall world market. This is especially significant since on occasion the prices of sour and sweet crude can diverge.

NYMEX management, like that of the NYSE, is also focused on increasing profitability. One can argue that both exchanges have been run for the benefit of their members, with little emphasis on the bottom line. Having public shareholders will usher in a new list of priorities for both exchanges, including building profits, which at the NYMEX totaled only $27 million last year on revenues of $237 million.

Further out, Mr. Newsome looks to the underlying growth in the markets to provide considerable expansion opportunities. The price rise and volatility in oil markets this year has meant record activity.

There is also the possibility of some strategic combinations. The head of the NYSE, John Thain, has often talked of trying to add options and futures products to the NYSE lineup. Though most expect him to focus on financial futures, there is a good possibility the distinctions will blur. The high prices of the exchange stocks, according to Mr. Repetto, reflect some takeover premium.

Mr. Newsome sees further consolidation and competition ahead. “There are major changes underway. Eventually there will be some combining of the physical and securities markets” he predicts. “The markets are very exciting. It’s a real challenge.”