Great story. The part that sticks out to me is 72% (the discount that GS got due to busted trades) and 0% (the discount Knight got due to busted trades.) If you're going to eff up, first make sure you're a big player!
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.
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).