what is this allowed?

There has been discussion to make the Rush process for fraternities more formalized but honestly no one cares enough to change it. Especially since most of IFC exec isn't really out to make waves

Men thrive on competition. Women are more comfortable with cooperation. The strongest fraternities wouldn't stand for recruitment restrictions. The strongest sororities wouldn't stand for any changes to their formal rush. With fraternities, its "March or Die". With sororities its "We have no chance to rise in the rankings but at least we're guaranteed a pledge class."
Everyone's happy.

What if the small fraternities voted to change the recruitment system and the big fraternities refused to go along? Who wins?

If the IFC votes, it becomes law. It doesn't matter what an individual fraternity wants.

The big fraternities can always pull out of IFC and start their own.

I don't think theres any problem with IFC now but don't think that unhappy fraternities couldn't break it up if they wanted. I talked to our Nationals and they said that all the fraternities at university of Colorado pulled out of university recognition and formed their own IFC. And when my dad was at Georgia the big fraternities didn't like the rules imposed by smaller chapters so they pulled out of rush and held their own for a year. I'm sure that all fraternities don't require their chapters to be in IFC if there's a controversy that hurts their recruitment. Some of them don't even require university recognition.

This is so stupid. First off, with the exception of this fall, IFC has never had a rush as big as panhellic. Meaning it would be impossible for every house to take 80-90 girls like Panhellenic does. Second Panhellenic and IFC are completely separate and have no bearing on each other, believe it or not, not every fraternity wants 250 brothers, some enjoy having 120-130 or even 80-90, putting a sanction on a chapter for not holding a specific number of guys is stupid.

fraternities are not controlled by sorority regulations about quota and limitation, etc.
Whether you want to have 20 guys or 200 that's up to you. I would enjoy formal rush for fraternities but no rules about how many pledges you have to take.