In the chemotaxis pathway of the bacterium Escherichia coli, signals are carried from a cluster of receptors to the flagellar motors by the diffusion of the protein CheY-phosphate (CheYp) through the cytoplasm. A second protein, CheZ, which promotes dephosphorylation of CheYp, partially colocalizes with receptors in the plasma membrane. CheZ is normally dimeric in solution but has been suggested to associate into highly active oligomers in the presence of CheYp. A model is presented here and supported by Brownian dynamics simulations, which accounts for these and other experimental data: A minority component of the receptor cluster (dimers of CheA(short)) nucleates CheZ oligomerization and CheZ molecules move from the cytoplasm to a bound state at the receptor cluster depending on the current level of cellular stimulation. The corresponding simulations suggest that dynamic CheZ localization will sharpen cellular responses to chemoeffectors, increase the range of detectable ligand concentrations, and make adaptation more precise and robust. The localization and activation of CheZ constitute a negative feedback loop that provides a second tier of adaptation to the system. Subtle adjustments of this kind are likely to be found in many other signaling pathways.