Is there another mechanism that serves the same purpose as a market order, but that isn't quite so vulnerable to these flash panics? Maybe something like "sell if it stays below $X for more than an hour"? Though I guess that wouldn't save you if the crash really was because of bad news.
In short there is no perfect "stop loss" order. There is either price risk or execution risk - pick your poison.
That said, unlimited price risk and zero execution risk is probably NOT the optimal point to be at.
Certainly, I would never put in a market order when the market is operating under circuit-breakers and things are unstable. When things are stable, it can be a reasonable choice for someone transacting in stock who just wants it done so they can get on with other things they have to do.
It makes people think about how the market actually works instead of how they hope it works.
I would be in favor of restricting the use of market orders by non-professionals during any time a market special rule is in place (circuit breakers, Rule 48, etc.) However, I think allowing them during normal market operation makes transacting easier for investors, which is also a good thing.
So I've seen things like having a trigger in an order manager that at a certain price will place an aggressive IOC limit order to unwind something. In normal conditions that will behave exactly like an at-market stop loss order, except that in the case of really extreme disruption you won't get filled before your limit. So the hope is in those cases the market will bounce. You don't want to get unwound at any cost on your stop if the market is going to rapidly recover afterwards. It also means there's no information leakage if you're worried about your broker taking advantage of the information in your stop (paranoid, but yes...).
As you've said, there's no panacea.
Really you should buy the thing you actually want - a down-and-in put option struck at $70. But that would cost money, whereas you can do a stop-loss order "for free", so people prefer to do that.
IMO these stop-loss orders are bad for the market, people trying to get something for nothing, and if the increasing prevalence of flash crashes gets people to stop using them that will be do bad thing.
Stop losses are meant to exit you from a position, not just protect you from a crash, so it's not at all equivalent to getting a put. People use stops for profit taken when the trade is over or for cutting losses when the trade didn't go their way. It has nothing to do with getting something for free.
Stops are overused as a hedging strategy but there aren't really many alternative order types (stop limits are generally less vulnerable but not by much). If you are using stops it should because you've evaluated all your other hedging choices (options, futures, etc) and know they are right even in the face of flashes.
As for market orders the generally better choice is a fill or kill order that crosses the book.
The issue there is that in a fast moving market, you might not get filled. When the stop triggers, the order "becomes" another limit order in the limit order book, and if the market's already moved bellow your limit, you dont execute.
Also, Market Orders are ALWAYS executed before limit orders, even if the limit makes it executable. That's just the priority system of the market.
In the continuous market time priority rules. If a marketable limit order arrives before a market order, the limit order executes first.