Asymmetric Information in the Interbank Foreign Exchange Market

This paper provides evidence that large dealing banks have more information than small dealing banks. Our data comprise the complete record of interdealer trades, including identities and the direction of the aggressor, at a good-sized bank during one week in 1998. We stratify the banks into four size categories and examine trading patterns among the banks and how they are related to exchange-rate returns. The evidence supports two hypothesis current in FX microstructure: first, exchange rates respond to order flow because it carries information; second, customers bring information to the foreign exchange market