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Because the spoofing party already knows what is going to happen as soon as you react to such an order, even by using a bot, you are already too late. Most bitcoin exchanges are not very quick, so you can expect a latency of about several seconds which is too long to even anticipate on this.

The transaction fees will eat the little guy up if you don't buy or sell in large amounts.

transaction fees are almost always a percentage of traded amount, hence it does not matter if you trade $10 or $100000

Personally, I wonder if this is affecting long-term holders or merely extracting value from short-term traders.

Of course, if there is value in short-term trading (eg. adding liquidity) then this is unhealthy for Bitcoin/Ethereum.

It would be no more illegal than the original spoofy order.

Issueing orders you intend to fill would not be illegal, even if in response to spoofed orders.