I am also wondering about the red-name system. From what I understand, it is simply a tool to aid in the combat process, not a end-all, be-all solution. Essentially, it is very possible that you can be initiated on someone whose name isn't red for you.
Is there any reason that in order to trigger the red name system, you can only have been shot at? How come it doesn't work the other way around? (EX: If I shoot at someone, his name should instantly become red and so should all his group member's.)