Q: What is the NASDAQ Closing Cross?

A: The Closing Cross is the first successful electronic closing auction among U.S. equities markets - offering a highly transparent, accurate and orderly market close for NASDAQ securities - and providing the opportunity for everyone to use that insight to meet their trading and investment needs.

The Closing Cross brings together the buy and sell interest in specific NASDAQ stocks and executes all shares for each stock at a single price, one that reflects the true supply and demand for NASDAQ securities.

Q: Why is the Closing Cross important?

A: The Closing Cross provides the Russell Investment Group and approximately ten thousand mutual funds with the ability to calculate their end-of-day values. A highly transparent and accurate closing price gives the industry even greater certainty in pricing major transactions and mutual fund Net Asset Values (NAVs). The C losing Cross enables market participants to execute market and limit-on-close interest in a robust price discovery facility. It provides a central place where orders interact and where the entire industry gets equal opportunity to participate.

Q: What prices does Russell use to calculate Russell Index returns?

A: Russell uses primary exchange closing prices as published by the primary exchanges: NASDAQ, NYSE and AMEX. Where stocks are dually listed, the primary exchange is the first exchange that the company was listed on, until it delists completely and moves to another exchange.

A: Russell currently uses the NASDAQ Closing Cross for approximately 1,700 securities. Included in the Closing Cross are Microsoft Corporation, Bed Bath and Beyond, JetBlue Airways Corporation and Dell Inc.

Q: Why does Russell care which prices are used for NASDAQ-listed securities?

A: Russell is concerned that investors are able to achieve fair prices for securities in the Russell indexes, especially during the annual reconstitution. Because the Russell indexes contain 98% of U.S. market cap, securities traded on all national exchanges including NASDAQ, NYSE and AMEX are included in Russell's index family. Assets indexed to Russell indexes have grown more than 186% over the past five years, so Russell's concern has grown accordingly.

Q: How did Russell make the decision to use NASDAQ Closing Cross?

A: For NASDAQ listed securities, Russell essentially has four pricing choices. First, Russell could use the consolidated last sale, which represents the last trade on any market center (including regional exchanges) that trades NASDAQ securities, but doesn't well represent true aggregate market interest for the day. Second, Russell could use NASDAQ's original Official Closing Price, determined by an algorithm, which is an improvement on the last trade because it is designed to reflect the market interest at the close, but does not provide a true representation of the price at which buyers and sellers meet. Third, Russell could use NASDAQ's SEC-approved Closing Cross, which provides a facility where actual market-on-close interest comes together at a common price. Finally, other electronic exchanges also offer closing prices but, like many other closing prices, are not subject to NASD regulation, which may place investors at risk. Members of Russell's Index Client Advisory Board reviewed the alternatives and agree that NASDAQ's Closing Cross is the best alternative to match buyers to sellers in NASDAQ listed stocks.

A: Russell uses primary exchange closing prices and is committed to using NASDAQ's official close.

Q: What is the difference between NOCP and the NASDAQ Closing Cross?

A: NOCP is an acronym for NASDAQ Official Closing Price. The original implementation of the NOCP was a calculation that reflects market interest at the close. NASDAQ takes that last trade to be reported to NASDAQ by 16:00:02 and compares it to the Inside Quote at the time of the trade (i.e. 4:00:00 for active securities). If the trade falls within the Inside Quote, then the trade price is used as the NOCP. If the trade price is below the best bid, then the best bid price is used as the NOCP. If the trade price is above the best offer, then the best offer price is used as the NOCP. NASDAQ calls that process “normalization”.

As NASDAQ has launched the Closing Cross, the price and volume of the closing cross execution is used to populate the NOCP value. So, if in stock ABCD, there are 100,000 shares traded in the closing cross at $20.00, the NOCP will be $20.00 for 100,000 shares. While the NASDAQ is home to many large well-known companies, like Cisco Systems, many securities traded on the NASDAQ are small, lesser-known stocks. These small lesser-known stocks do not have significant market-on-close interest on normal trading days. NASDAQ will not execute a cross in a stock if there is no market-on-close interest entered into NASDAQ by the cutoff time prior to the cross. In those cases, NASDAQ will use the original NOCP calculated value as the official close price. However, all NASDAQ stocks, large and small, can have significant market-on-close interest during Russell index reconstitution when a closing cross becomes very important to match buyer and seller interest.

Q: Why doesn't Russell use consolidated last prices?

A: Russell was forced to use consolidated last prices for many years as there was no alternative. Consolidated last prices are not good representations of the aggregate market activity for the day because it is quite literally the last trade of the day, regardless of trade size or relationship to the aggregate volume of the day.

Q: What happens if the systems for NASDAQ's closing cross go down? What will Russell use? Does Russell have any concerns over a possible NASDAQ systems outage?

A: Russell will rely on prices published by NASDAQ in any event. Russell is very comfortable with NASDAQ's systems and technology, its communications with the street and the uptime of its systems.

The reliability of individual systems and services is commercially unprecedented. In 2003, NASDAQ achieved 99.993% uptime for its Market Center trade execution platform and 100.00% uptime for data feeds.

NASDAQ has spent a great deal of time testing the Closing Cross, as well as all of its Market Center systems, for performance and reliability. NASDAQ performs stress tests every weekend for different components of its systems to ensure that it is continually able to meet the capacity demands of the industry. It repeatedly tests the Closing Cross, using a blend of market conditions, order types and sizes, and participant types in order to simulate actual trading conditions, and then the system is stressed in every area simultaneously in order to ensure optimal and reliable performance across all components.

While NASDAQ is highly confident of its reliability and performance, and its readiness for the capacity needs on the Russell Rebalance, it also works closely with the industry to prepare contingency scenarios for emergency events. NASDAQ continually prepares and publishes contingency scenarios.

Q: Why didn't Russell use AMEX prices for the 12 NASDAQ securities listed?

A: Russell uses primary exchange closing prices and AMEX was a secondary exchange for the securities in question.

Q: Why does it matter which prices are used for Russell indexes?

A: Prices used to reconstitute the Russell indexes are important to ensure Russell indexes accurately reflect the market changes. Additionally, more than $362 billion are passively managed against them. Passive managers typically have a goal of minimizing their tracking error and utilize index prices used to achieve minimal tracking error. Russell is concerned that investors are able to achieve closing prices in a fair, robust market for all securities in the Russell indexes including those listed by NASDAQ.

Q: Why has NASDAQ made so many changes in their price methodology over the past few years?

A: NASDAQ is about innovation and competition. In order to remain competitive, NASDAQ must continue to innovate and has done so by offering the first electronic auction in the U.S.

As the growth of funds and other instruments following the indices has accelerated over the last several years, NASDAQ has actively sought industry input to improve the mechanism to close the market each day. The first step was to establish a closing price that was a reflection of the market at the close - the NOCP, launched in April 2003. Then, once NASDAQ launched its new trading platform, the NASDAQ Market Center, its technology afforded them the opportunity to create an electronic auction mechanism to provide a true price discovery mechanism for market-on-close interest. The Closing Cross is the culmination of months of industry input and technology enhancements. NASDAQ believes that the Closing Cross is the optimal solution for its market close, and intends to leverage the Closing Cross for its market close for years to come.

Q. What is the NASDAQ market center?

A. The NASDAQ market center is a newly integrated system capable of trading of NASDAQ, NYSE, AMEX-listed securities and exchange traded funds on a single electronic platform.

Q. What are the benefits of the NASDAQ market center?

A. Launched in March 2004, NASDAQ’s enhanced trading platform has dramatic system capacity, reliability, speed, and numerous functionality features such as FIX, anonymity, and Multiple Participant IDs.

NASDAQ has a fully redundant trading system and has the ability to operate all NYSE securities on its single platform in the event of an emergency.

Trading interest at multiple price levels- participants can enter unlimited quotes and orders at multiple price levels.

Full anonymity- Anonymity offered through the SIZE market participant identifier (MPID) in NASDAQ Market Center allows participants to minimize the market impact that accompanies the working of large orders, while still exposing such blocks to large pools of marketable and non-marketable liquidity.

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