It was noted at both Mizuho and the exchange by actual humans, all of whom made the decision that they lacked personal authority to overrule the trader. The report by the regulator later was frosting when noting this, AFAIK.
I had to stop and think about what actually happens when someone posts an order like that, well outside the current bid/ask. What price(s) does it get filled at? Apparently -- if it works the same in Japan as here -- each bid already in the book would execute at its existing price, despite the fact that the asking price on the new order is far below that. You might think that they would execute at the average of the two prices, but that doesn't seem to be the case, from what I've managed to dig up. An example like this suggests to me that an even better choice would be the geometric mean. But the difference would matter only when someone had screwed up very badly.
The problem with disallowing your trader from ripping through a lot of the levels of an order book is that it can be a risk reducing move and what you intend to do sometimes. This trade is a clear fat finger but there are times when you will want to sweep the book to get hedged.
For instance, let's say your desk just got slammed with a ton of risk on an OTC (over the counter) option trade. You can immediately alleviate a lot of that risk (while paying through the nose) by selling 2000 contracts or 5 price levels of the ES (SP500 future). You can immediately place that order and get it filled and be hedged. If there were multiple points of human intervention required then you might lose a substantial amount of money. 2k contracts on the ES is $25,000 a tick. If word leaks that people are going to need to start hedging big then it could easily move 10 or 20 ticks away from you while waiting for your risk management team to approve your trade as not a fat finger.
Generally it's cheaper to just fire error prone traders. Heh, and anyone that is about to execute a 2k contract option trade generally has their hedge order queued up and ready to send to the market as soon as they hear the other side agree to their price.
If word leaks that people are going to need to start hedging big then it could easily move 10 or 20 ticks away from you while waiting for your risk management team to approve your trade as not a fat finger.
That's why I would expect it to be done in software. Yes, I understand that software can be buggy, and hard-and-fast rules sometimes need to be bent, but I would still expect it to be cheaper overall. But I haven't actually worked in the business, so this is just my $.02 :-)
And yeah it makes sense to have an extra prompt pop up if it's an order over X contracts or Y ticks from the market. And I've seen a lot of systems set up like that.
A lot of times traders will just punch the "OK" box and do their trade though.
That's of course if traders are manually hedging their portfolio/trade. A lot of times they just set their portfolio to auto-hedge based on certain parameters (ie at Z deltas or we've moved C ticks in a time period).