[KMag]

In Goldman's case, Goldman was literally sending out options orders with as ask price of $0. I don't recall if it was the exchange or regulators that decided "If you bought below $x, you knew you were trading against a broken algorithm and shouldn't have expected the trade to last".

I'm not sure if any of the orders Knight was sending out were clearly so erroneous. It's also possible that only after the Knight incident is when it was made clear to market participants that they should expect clearly erroneous trades to be broken.

In any case, Knight was a major liquidity provider, and it wasn't in the market's best interest for them to go bankrupt, but it also sets a very bad precedent if plausible orders get broken.

[pclmulqdq]

As far as I know, Knight was unique in that its orders were obviously stupid, but not obviously mispriced or mis-sized. It's not a case of a clear fat-finger error that would be visible to other market participants.

I know that in many markets, the exchange will reverse your trades if the counterparty made an obvious, visible error (eg $0 ask price on a limit order).