we can argue there should be protections to stop liquidating people if the market drops by a certain percentage

From what I've been told, Poloniex's margin trading engine has a 'protection' like that in place. A while ago we saw ETH/BTC on Polo crash by 20% in an instant but then trading froze for several minutes as (presumably) an engineer there was fixing things and trying to prevent it from crashing further... pretty intriguing haha :)