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I know that each stock has at least one market maker that is responsible for keeping the equity market flowing normally, but what about the option markets?

Are the respective market makers also bound by legal obligation to step into the option markets when the bid-ask spread is too large? Or is that outside of their job description?

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There is a maximum size for a Valid Width Quote and its size varies depending on the price of the option as well as whether it's a standard option or a LEAP and if ITM or not. If I remember correctly, the maximum is $5.

It's not that the market maker has to step in but rather that he could post his quotes at the maximum and if traders were not placing orders within that maximum then the market maker's quotes would display the maximum.

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  • Could you elaborate on exactly what you mean by your last paragraph? Who is "he", are you referring to the market maker, or a hypothetical counterparty? And if possible, include an example - so a layman like me can more effectively understand what you are trying to communicate.
    – AlanSTACK
    Commented Oct 18, 2020 at 7:08
  • @AlanSTACK At any time, the bid is the highest unfilled buy order and the ask is the lowest unfilled sell order. Orders from market makers and from other traders are treated the same. So the market maker (who is Bob's "he") doesn't specifically "step in" but just always maintains orders to buy and sell. These will be the bid and ask unless another trader enters tighter ones.
    – nanoman
    Commented Oct 18, 2020 at 7:25
  • @nanoman Oh okay, thank you for the clarification.
    – AlanSTACK
    Commented Oct 18, 2020 at 7:45
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Yes.

All exchange members appointed as an options market maker have a continuous quoting obligation (usually more than 60% of the series and time in a given class), combined with an obligation to quote no more than $5.00 wide (except in certain circumstances).

An exchange generally will only begin listing a security if there is a sufficient number of market makers and will delist such securities if there aren't enough market makers in a given security (e.g. the existing market makers have resigned from their market maker appointment).

See this link for a longer description

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