Illiquidity is one possible reason, news and actions are other ones (e.g. Swiss Franc peg and removal of peg in 2010s, credit events etc.). No need for markets being closed or illiquid, just people figuring out a new state or straight jumping to it - and that expresses itself in a lack of liquidity sometimes, but it's not the cause.
Yeah AMM liquidity pools suck at repricing, this got me thinking… maybe liquidity providers can just disable their particular liquidity pool share in such an event. The goal is to see what price people will buy and sell at, which is what market makers do all day every day in other systems.
(I’m sure people will try to abuse that to warp liquidity, but they already can by unwinding and removing their share.)
