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In case you were camped out in an igloo in Antarctica and missed the news, 12 companies were replaced in the Nasdaq 100 Index (the NDX) yesterday. “So what?” you ask, “Why should I care?” To most traders, I’d simply say: Remember where the price of your QQQQs comes from. Eleven of the twelve new stocks, well, whatever. But then there’s Google…

Why is Google such a big deal? Not simply because it was added to the NDX, but because it has gone from “not in the index at all” to “the third most important company in the entire index” in one fell swoop. The other eleven companies are down in the lower end of the “100,” as you may expect.

Not convinced yet that this change is worth noting? Consider the following facts (couldn’t find a listing, so I did this crap with a hand calculator):

1. Other than MSFT and INTC, GOOG is the largest company in the NDX. Since the NDX is a market-cap weighted index (sort-of… see below), changes in GOOG move the index more than changes in DELL, ORCL, AAPL, EBAY, QCOM. More than Amgen. More than Cisco!
2. The combined market cap of the 12 companies that were dropped from the NDX is $34.6 billion. The combined market cap of the 11 other newly-added companies added is $59.5 billion. Google alone has a current market cap of $123 billion.

Here’s what I meant by “the NDX is market-cap weighted, sort-of.” Back in the old days (the ’90s), it was purely market-cap based. Unfortunately, that meant that only five stocks accounted for 60% of the index’s movement! Nasdaq decided to modify their formula, but how they modified it is “proprietary,” which I suppose is highbrow for “nun yo’ bidness.” Here’s how Nasdaq describes the NDX:

The NASDAQ-100 Index is a modified market capitalization-weighted index. The value of the Index equals the aggregate value of the Index share weights, also known as the Depository Receipt Multiplier (?DRM?), of each of the Index Securities multiplied by each such security?s NASDAQ Official Closing Price (?NOCP?), divided by Adjusted Base Period Market Value (?ABPMV?), and multiplied by the base value.

…got that? Yeah, me too. Anyway, the point is: if you trade the Qs, if you trade options on the Q’s (don’t we love ‘em!), if you trade other NDX stocks that get arbitraged against the index, start paying more attention to GOOG! Look at that chart– this thing’s gonna move the NDX (especially if it breaks), which is gonna move the Qs, which could start a chain reaction. Forewarned is forearmed. Cheers.