Since there's 2 parties to every trade doesn't that make 50% the limit?

Nope, sometimes they bought stock they sold themselves!

If you sell stock to yourself... why even bother to go through the exchange? Why would the exchange even allow such trades?

Knight has different programs running. It was handling >10% of all NYSE, so it must have been running a lot of servers. When the berserk algorithm wanted to buy or sell a stock where Knight was the only "market-maker", another Knight server would usually intercept the order after it had been posted on the exchange. Here's one way it might have happened: http://www.nanex.net/aqck2/3525.html

Trading volume is number of shares traded, not number of trades. Re-reading, it was actually ~600% greater volume.

"The difference reached a peak at 9:58 a.m., when the volume was six times greater."

That's pretty noticable!