It's "legal", certainly. Whether it's "ethical" varies considerably and is a matter of opinion anyway. I wouldn't say that misleading customers about who they're really betting against is very "ethical", and neither do regulators, when this issue's commonly discussed. (FXCM, anyone?).
I'm cynical about the industry but even I wouldn't put the figure as high as that, from my own previous experience and general impressions. This is hair-splitting, though.
Highly unlikely (at least) that they do so on an individual basis, but collectively, they certainly do. They know where thousands of stops will be bunched and how to take them out. In the trade, that's part of "scalping", more or less.