I've only ever heard of this associated with market orders, but this blog talks about a 20-contract minimum with limit orders which will trigger market makers to step in front of a limit order. http://www.optionsuniversity.com/blog/options-universitys-options-101-part-53/ This SEC document says the same. https://www.sec.gov/rules/sro/34-43086.htm I saw maximums from CBOE in the mid-00s but nothing else. Are these the same? Why were there maximums and minimums if they were the same?
This article is not accurate and 20 contracts, to my knowledge is not a thing. When I was a MM I had a value for each option I made markets in by setting my skew curve. I then set the profit or vig that I required for each set of options, I did that by the delta. E.G. 75-100 >$0.10, 50-75 >$0.05, 25-50 >$0.04, 0-25 >$0.02. (This is random and just an example) Then I would set my market to either match the away bid/offer, be higher by a value or be lower by a value to determine how aggressive I wanted to be. I would also set a minimum value to me changing my markets. I might choose at least 5 contracts in one market or two. This was all preset but could be quickly altered for an entire set of options or just a few. I used Actant Quote with scripting. So now lets do an example. I think a call is worth $1.50 and I want $0.03 profit to that to do a trade and this options trades in pennies. I would buy up to $1.47 and sell down to $1.53 10 times. There is no paper on any option book on any exchange and the option does not trade much. The only markets are from market makers. Let say a few of us go 1.40/1.60 10x10. Let say the stock does not move. You bid $1.45 for 1. My market does not change as I want 5 contacts to match. You bid 1.46 for 10, my system then bids 1.46 for 10. If I were more aggressive, I might want to show a bid or offer always one penny better than others as long as I get my vig. No one is trying to do anything to you. It is a auction market and when nothing is happening, there is no reason to be aggressive and make tight markets. But when there is order flow, you want to play. I left the floor in 2010, but I doubt much of this has changed. There is no incentive to make tight markets when there is no other paper. This is no different than other businesses. If you are the only hardware store in a town, you can charge more but when Lowes opens, your prices drop.