Thirty years ago,Russell Investments changed the landscape of how fund firms could evaluate managerial performance, by launching broad benchmarks of stock performance in the United States.

These were the Russell 3000, 2000 and 1000 indices, intended to be more accurate and comprehensive equity indexes, compared to the Standard & Poor's 500, which tracked large-cap stocks, and the Dow Jones Industrial Average, which tracked just 30 stocks all told.

"At the time, if you were a small-cap manager, you would have been benchmarked against the S&P 500. The mid-80s was a very bad time for small caps. Small cap managers were just getting killed, and then, when they were being evaluated, it looked like it would be better to just be in the S&P 500," said Rolf Agather, director of research and innovation for Russell Indexes. "There really was a better way to look at the world" and measure so-called "active" managers.

The 3,000 was the largest universe, covering the broadest range of "investable" equities. The 2,000 covered small-cap stocks, until then largely unwatched. And the 1,000 had twice as many large-cap stocks as the S&P 500.

Now, $3.9 trillion of assets are benchmarked against Russell's indices. So Russell's look at the world is expanding to Europe, where it hopes to replay its performance here with a set of indexes that are broader than those currently available-and easier to calculate.

Tapping Russell on the shoulder for that effort is Chi-X Europe, which is trying to establish itself as the dominant market for trading in stocks from all parts of the continent and the United Kingdom.

The four-year-old alternative to the London Stock Exchange and other more nationally centric bourses in August in fact recorded the most turnover of any trading venue in Europe, according to statistics compiled by the Federation of European Securities Exchanges.

Chi-X Europe recorded turnover of 213.8 billion euros on 43.1 million trades, according to the FESE. The LSE recorded turnover of 205.2 billion euros on 26.3 million trades.

Trailing behind is BATS Europe, operated by BATS Global Markets of Lenexa, Kan., which recorded 56.8 billion euros of turnover, on 15.1 million trades.

But the point there is this: Chi-X Europe will get even bigger, around the turn of the year, if a planned acquisition by BATS Global Markets is approved and completed. In that case, Chi-X Europe will be merged with BATS Europe to become BATS Chi-X Europe.

The plans to start marketing indices with Russell starts with this: Size matters. The creation of equity indices is a way for Chi-X Europe to get more investment banks, trading firms and pension fund managers to buy stocks on its platform.

And it's not enough to be larger than the London Stock Exchange. Also merging at around the turn of the year, if approved, as well, will be the Deutsche Boerse and NYSE Euronext, operators of exchanges in Frankfurt, New York and Paris. The DB-NYSE combination will dwarf any other exchange operator in size.

Enter the Chi-X Europe Russell Index Series, or CHERI indices.

At the start, these will include four measures of Pan-European market activity:

* Chi-X Europe Russell PanEurope Index. This includes 216 large-cap securities in 14 countries and five currencies.

* Chi-X Europe Russell Eurozone Index. A large-cap index with 130 stocks from the Eurozone.

* Chi-X Europe Russell PanEurope 60 Index. The 60 biggest stocks only.

* Chi-X Russell Europe Eurozone 40 Index. Forty securities from eight countries in the Eurozone.

As in America in 1984, the indices in Europe are trying to find a foothold by providing broader indices than existing, widely watched benchmarks on the Continent. Possibly the most widely watched is the Euro Stoxx 50, designed by Stoxx Ltd. for Deutsche Boerse and SIX Group. That index was introduced in 1998.

Stoxx has followed, to some degree, the Russell tack and now offers a Global 1800, for instance, as well as sector indices and country "optimized" indices.

A 50-stock index like the Euro Stoxx 50 is "no longer ideal'' for managing exposure to Pan-European market activity, in the opinion of Gareth Parker, senior director of index research, design and development for Russell in Europe, the Middle East and Asia.

That index, he notes, is limited to investable stocks in countries that use the euro as currency. Which eliminates what Parker estimates is "40% of the market" in Europe: Stocks in the United Kingdom and Switzerland.

If a bank or trading firm wants to invest in Euro Stoxx stocks to get exposure to Europe, "it's a tricky take," Parker said.

Not only are the stocks limited in geographic diversity, but they also are large-cap stocks. As in North America nearly three decades ago, that means an opportunity to bring in indices that also represent trading in mid-cap and small-cap stocks.

"The Euro Stoxx 50 Index provides a blue-chip representation of supersector leaders in the Eurozone, which by definition does not include Switzerland or the United Kingdom,'' said Hartmut Graf, the chief executive of Stoxx. "The Stoxx Europe 50, however, represents supersector leaders from 18 European countries and also includes Swiss and U.K. companies."

Russell's alliance with Chi-X Europe also should prove to be more cost-effective and simpler for fund managers, banks and trading firms. Any financial institution wanting to broaden exposure to Europe, through one of the indices, does not have to go to multiple markets.

To get the same basket of investable assets, the manager only has to go to one venue: Chi-X Europe.

Establishing the indices is only "step one'' of Chi-X Europe's efforts to build on the volume of trading it has captured, said Guy Simpkin, who is responsible at Chi-X Europe for developing additional business.

The longer-term play is to get fund firms or other market players to license the indices and create tradeable products based on them.

The natural extension, of course, is "plain vanilla" exchange-traded funds, he notes. But also in the works are licenses to firms who want to create "bespoke" or custom products that might, for instance, have "options embedded in them,'' he said.

Chi-X Europe intends for the indices to be durable and not subject to much turnover of components. In its 60-stock index, for instance, a security won't fall out unless it drops at least as far as being the 70th-ranked stock. A new stock can't join, unless it's ranked as the 50th-largest stock, by the index's criteria.

The indices, including the broadest, have been back-tested using historical data for the last dozen years, to make sure they "reflect the underlying core market," Simpkin said.MME

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