The three day settlement rule applies to the NY equity markets. Other markets, including NY fixed income products, run under different rules, including same day settlement.
And this isn't a fraud prevention measure, it's a legacy of the days when settlement included someone carting a stack of stock certificates from one bank's vault to another.
Lastly, most traders trade on a contractual basis, not a settlement basis, so their trades are considered binding as soon as the agreement is in place.
1. In the US, most exchange operators are the counter-parties to all trades. They also interact with settlement and clearing services that ensure the verification of proper ownership and conveyance of securities. In the old days, something like a third of all trades failed to meet the three-day window because some part of this process would fail.
2. There are very very specific rules regarding how the orders are crossed (buy and sell side) and which orders take precedence in the (limit order) book. It looks like the MtGox guys didn't think this through and the trader in question took advantage of this naivete on the part of MtGox.
3. Most exchanges are "brokered" to facilitate trades while MtGox is more like a swap-meet. Brokered exchanges are more expensive to trade in but they have the advantage that brokers can "know" how to get price-improvement based on market conditions. In short, they are "informed traders" vs the "uninformed traders" you see in most post/notice markets. When the informed meet the uninformed, you see situations like this where someone takes the whole shebang home.
Personally, I find it amusing that the Bitcoin fanboys are clamoring for intervention here. It's almost like they are getting to the idea that a strong regulatory environment is a /good/ thing for the free market. If this were the cryptopunk/libertarian paradise that everyone dreams of for Bitcoin, there would be /no/ recourse.
I'm not sure where you're coming from with #2. Most exchanges use price-time priority to determine execution order. From the description the best bid was $0.01, so obviously he would get filled first at $0.0101.
The real problem is that the market was able to descend to that level to begin with. There should have been some sort of circuit breaker limits in the Mt. Gox system that would have halted such a massive decline, similar to what exist in the US equity and futures markets.
As to #3, really the only thing that matters in terms of exchange access in the US is that you satisfy the appropriate compliance burdens (broker-dealer status) and can pay the fees required for naked access. That may be good selection criteria for "informed traders" but it certainly isn't any guarantee.
What I meant in #2 was that there are market structure rules about things like minimum price improvement levels and how widely a buy or sell order is circulated before finding a cross. The HFT guys are masters at exploiting the market microstructure to extract alpha. Google SOES bandit if you need further examples.
As for #3, naked access is a relatively new invention and the rules are sufficiently constructed to virtually guarantee that only implicitly informed parties are ever going to see "naked" access.
Circuit breakers (actually the lack of them) is one of those things that enabled this to occur. The party in question essentially copied a strategy that was used by the HFT guys to soak up the offer. The seller got liquidity but it came at a very dear price.
And that's really the issue here: circuit breakers are a compromise between liquidity and price discovery. If the exchange suddenly sees that price discovery is trending outside of a range, they shut down trading. If the problem is a systemic market one, then this probably is a good idea. But if price movement is because of new information, then all the circuit breakers in the world wont help you because as soon as trading resumes, the new regime will be in play.
An order with 1/100th penny precision isn't usual for currencies, but I see your point. Either way, this was a very unusual situation. Why were there so many people sitting at $0.01? If you're going to play that game, why not jump on at $0.011 or $0.02? Hell, pretty much anything < $1.00 you could probably safely assume would give you a profit as long as you were willing to bet you weren't watching the demise of the BTC.
And this isn't a fraud prevention measure, it's a legacy of the days when settlement included someone carting a stack of stock certificates from one bank's vault to another.
Lastly, most traders trade on a contractual basis, not a settlement basis, so their trades are considered binding as soon as the agreement is in place.