Illegal - no, Godaddy states in their TOS how long after expiry you can recover your domain and that you can't after 30 days. By registering your domain at GD you accept those. You are free to register your domain with any other registrar which doesn't auction off expired domains.
The only thing one could argue about is that you don't get the actual registry-side 30-day redemption phase (in contrast to the 0-45 days autorenew-grace period) in which you could restore your domain for an additional fee.
As to why people don't bid on regular listed domains but on expired domains:
There might be a lot of reasons, often the price I suppose. Expired auctions always start at $12 and people think and can make a bargain.
Probably for this reason I suppose a lot of people (like me) only check GD expired auction lists and not regular auctions/offers.
Most regular auctions will have a high reserve and/or high BIN as they are often priced at end-user levels.