The New York Mercantile Exchange could get a badly needed boost in popularity, if regulators begin cracking down on the

Intercontinental Exchange

(ICE) - Get Report

in the wake of the Amaranth hedge fund debacle.

Energy traders increasingly are taking their business to the ICE, an upstart all-electronic market that plays under a much looser regulatory framework than the Nymex. In its brief six-year existence, the Atlanta-based ICE has stolen market share from the Nymex, putting a scare into the 132-year-old commodities exchange's top brass.

But that could change if regulators begin making the ICE play by the same rules as the Nymex. The

drumbeat is growing for bringing the ICE under the auspices of the Commodities Futures Trading Commission, as evidence mounts that a good deal of Amaranth's ill-fated natural gas trades went through the loosely regulated ICE.

A more level regulatory playfield between the two commodities exchanges not only would bring more oversight to the energy trading markets, it would drive more hedge fund trading to the Nymex. That's critical for the Nymex, which filed for a $250 million IPO this summer.

"Nymex would be helped because their competition would be operating under the same regulatory format," says Michael Greenberger, a professor at the University of Maryland's Law School and a former director of division of trading and markets at the CFTC.

The ICE currently is exempt from reporting over-the-counter trades to the CFTC because it's regulated by the U.K.'s Financial Services Authority. The unusual oversight arrangement stems from a 2001 acquisition in which the ICE bought the U.K.-based International Petroleum Exchange, which was the predecessor to its futures subsidiary

If the ICE were brought under the jurisdiction of the CFTC, U.S. regulators would be able to better determine if there was fraud or manipulation of the OTC market, says Greenberger.

Also, U.S. regulators would then get regular reports from the ICE about any unusually large trades. The CFTC requires the Nymex to impose "speculation limits'' on the size of trades in the futures market.

A CFTC spokesman declined to comment.

Observers say the troubles at Amaranth could have been avoided had the Greenwich, Conn., hedge fund's trades been more transparent as well as limited. Last week, Amaranth lost about $4 billion on a series of high-risk bets that natural gas prices would rise at a future date.

In the last few years, Nymex's market share has been "chipped away" by the ICE, says one Nymex member, who didn't want to be identified. If the CFTC steps up regulation on the ICE, the Nymex could increase market share by simply maintaining its trading volume, he says.

In the first seven months of this year, future contracts volume on the Nymex rose 36% to 152.6 million, compared with the first seven months of 2005. But over that same period, futures contracts on the ICE more than doubled to 45.7 million, according to the Futures Industry Association.

Officials with the Nymex and ICE declined to comment on the competition between the exchange for market share.

The ICE has been expanding quickly and is fairly new to the public realm. Last year, its revenue rose 44%, to $155.9 million, while its net profits soared 84%, to $40.4 million.

The exchange, which launched with the support of

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

, completed its initial public offering last November by raising $55 million in net proceeds. Shares of the ICE have risen nearly 80% since its debut as a public company.

On Sept. 14, the ICE announced a deal to acquire the privately held New York Board of Trade, which specializes in trading food commodities, for $1 billion in cash and stock. The deal is expected to be completed in the first half of next year.

Up until the Amaranth debacle, shares of the ICE were continuing to race higher. The shares have fallen 8% in recent days. But for now, most analysts see the Amaranth meltdown as nothing more than a minor pothole.

"Although the full impact of the hedge fund's trading losses won't likely be clear for quite some time, ICE's role and the impact on the electronic exchange appears exaggerated in the press," writes Sandler O'Neill analyst Richard Repetto, in a recent research report. "The hedge fund likely used options on energy futures to establish its highly leveraged positions. Options on energy futures ... have not gone electronic nor are they blocked or printed to ICE."

Repetto, who rates the exchange buy, raised his per share earnings estimates for the ICE, citing greater than expected futures volume this month.

Robert Rutschow, an analyst at Prudential Equity Group, estimates that the "worst case impact" from Amaranth on ICE's revenue is about 2%, but "a likely impact on revenue of perhaps 0.5% of revenue."

On Monday, the ICE also downplayed the impact of Amaranth. The exchange issued a statement saying that "Amaranth's business is not individually material to ICE's revenues. In addition, Amaranth's losses do not appear to have resulted in any disruption to the operation of the natural gas markets."

The ICE spokeswoman, however, declined to comment on the impact of stiffer regulation on the exchange.