What is a referee in the manuscript submission process? Please submit, with the manuscript, the names, addresses (including
  countries), and e-mail addresses of five potential referees who are
  outside the authors' institutions and must not have conflict of
  interest with the authors.


Do you think I should name 5 researchers from a similar area that are not affiliated with my university and co-authors? Is this what referees are?
Yes.

A "referee" in an academic context is


  An expert who judges the manuscript of an article or book to decide if
  it should be published.


You should make sure to find established researchers who are capable of judging your manuscript and who do not have conflicts of interest (e.g., frequent collaborators).

This canonical question may be helpful: What does the typical workflow of a journal look like?. Or the peer-review tag (although peer review is somewhat more general than manuscript refereeing).