Sources of Information Advantage in the Foreign Exchange Market

This paper examines the sources of private information in the interbank foreign-exchange market using a transactions database that includes trading-party identities. We show that sustained post-trade returns rise with bank size, implying that larger banks have an information advantage. The larger banks exploit this information advantage in placing limit orders as well as market orders. We also show that the bank’s private information does not come from their corporate or government customers or from some asset managers. Instead, the bank’s private information appears to come from other asset managers, including hedge funds, and from the bank’s own analysis.