Seems like market makers are pro-rata, if the option spread is very wide I can always better the market and get filled first right? Who am I competing against? I've contemplating about retail market-making on wide-spread illiquid options, just a few contracts with tight risk, nothing on a large scale. Wouldn't try it on the stock exchanges because they are time priority, but pro-rata seems like I have an obvious advantage. Am I missing something?
You will find that your markets will be matched by the market makers. Generally the market makers will not allow a bid or offer of yours to stand alone if there is edge in it. Where you might have an edge are in products where you have priority over the market makers. For example the VIX, single listed on the CBOE, will give a customer priority when the order is placed in the book. This is a big advantage, as markets may be 5,000 up but your order will be first to fill.
Interesting. Do you happen to know where I can find information about priority on the CBOE website? It seems to be different from product to product, but I cannot find the information.
You may want to call the CBOE help desk, 1-866-728-2263. They may be able to give your more information.
Priority for customers exists in all option classes, so you will cut ahead of everyone else except other customers.
Priority only exists if a customer order is on the BBO; if the price is improved in an auction and there is no customer interest at that level, then priority wouldn't apply.