Abstract
This paper examines the price discovery process in a two‐tier market, specifically the foreign‐exchange market. The goal is to identify the sources of private information and to gain insights into the process through which that information influences the market price. 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.