There are many subsystems in Alpha 3, many of which aren’t in other SF games. I’m going to address here the red priority flash.
There are 3 tinted color change flashes in Alpha 3, not counting the white air recovery flash:
The blue “Timing Guard” aka Guard Protect (GP) blocking, which lowers the amount of guard and block damage taken;
The pink damage reduction flash, which lowers the amount of damage taken;
The red priority flash, which is a different animal altogether. It essentially determines who wins a trade, with several caveats and exceptions.
The first two flashes are both defensive, and are both caused by an input by the character blocking/being hit. The red flash, however, is automatic, and is triggered the circumstances of two attacks coming in contact with one another.
There are two main considerations for the red flash- at least, near as I can tell. The first is a priority ranking based on the strength of the attack, with each kind of attack being assigned a number:
(quickie English notes added by me)
| – | Point Value |
| Normal Moves | |
| Light | 0 |
| Medium | 1 |
| Heavy | 2 |
| Special Moves | |
| Light | 2 |
| Medium | 3 |
| Heavy | 4 |
| Alpha Counter | 4 |
| Super Moves | |
| Level 1 | 5 |
| Level 2 | 6 |
| Level 3 | 7 |
| X-ISM | 7 |
The second consideration is the actual category of move:
Outer- the attacking character extending an attack with their back facing the screen, the attack being “closer” to the screen;
Inner- the attacking character extending an attack while facing the screen, the attack being “further” from the screen;
Both- the attacking character extending an attack that strikes both on the inside and on the outside.
An example from All About Street Fighter Zero 3 (page 257):
BIG UPDATE: See comment section for a correction with regards to the following paragraph. Special thanks to USD.
Seeming to work like rock/paper/scissors, the red flash will help outer attacks beat inner ones, will help inner ones beat ones which are both inner and outer, and help the ones which are both inner and outer beat attacks which are outer. The exception seems to be that attacks which are of the same type can cause the red flash- see the Cammy vs Akuma picture at the top of this posts, which displays two “inner” attacks
In order to get the red flash, you must have an attack which both has a higher priority value, has overlapping hitboxes with the lesser attack, and also meet the correct criteria with regards to the type of attack as noted above.
However.
The parameters of spacing seems to be so specific as to be inconsistent. The hitboxes must overlap, but whether or not the red flash will happen and determine a winner seems to sometimes vary by the pixel- even when both attacks are done simultaneously, the difference between being less than a step closer can be the deciding factor. At least, that is my observation- there may indeed be a factor of actual randomness (there’s a chart in Japanese above, beside the one describing point values, which references probability), but I’m not sure how much that plays a factor.
Etc.
I’ve been corresponding with someone who’s trying to get a full translation of the things listed in the AAZ3 book, so hopefully there will be more developments on this end in the future.
Click Here for the full text of page 3 of the All About Street Fighter Zero 3 book, p.257 (Japanese)
YouTube channel blog 
The part about attack priority is right, but your categories for attack types and how they work are a bit off. This is a translation of most of the page, the middle left paragraphs (redundant).
What is Attack Nullification?
During fights, the red flash effect seen on a character connecting an attack indicates the occurrence of a new system, attack nullification. It occurs under specific conditions when attack and attack collide, and only one side’s attack actually hits the opponent (the attacking character takes no damage). Basically, you can think of it as temporary super armor, not being put into hit stun by 1 or 2 hit attacks.
Conditions for Attack Nullification to Occur
1. A trade between attacks with the same attack position occurs.
2. The attack you used must have a higher priority than the opponent’s.
*If the conditions for both 1 and 2 are fulfilled, then attack nullification will occur at a set rate.
Step 1: Check the Attack Position
If the attack positions match, go to Step 2. There are two types of attack positions, Front (the top pic), back (the middle), and these can be distinguished by appearance. If it’s the same attack then the position won’t change regardless of the direction the character is facing. There are also attacks that are both front & back (the bottom pic), like all projectiles, Chun-Li’s close standing HP and Sodom’s jump HP, but nullification can’t occur with these attacks.
Step 2: Check the Superiority
Next, compare the priority of the trading attacks, and determine the attack nullification occurrence rate based on the priority difference (see the chart in the article). Priority not only affects fundamental attacks, but there are strength differences in special attacks as well. Also, in a trade between attacks with the same priority, attack nullification will not occur.
ATTACK NULLIFICATION OCCURRENCE RATE (The rightside chart)
Priority Difference – Occurrence Rate
0 – 0%
1 – 25%
2 – 50%
3 – 75%
4+ – 100%
It’s difficult to intentionally trigger attack nullification. Other than using high priority attacks, there’s no concrete way to raise the success rate. Even applying that, “a lot of jump normal attacks are back-type attacks, so when anti-airing with normals, if I use a Hard back-type attack, there’s a chance for attack nullification to occur in my favor” is about it.
Interesting! Thank you for the translation, I think that may literally be the first English translation of this information- people were wondering about it for a long time, myself obviously included.
I have seen attacks which are both inside and outside cause a red flash. Ryu’s fireball super (vs a sweep) may be an exception because it’s the super version, but I’ve seen it at least twice. And I recently saw Gen’s jumping HP in crane stance red flash, and that attack would also seem to be both inside and out. But maybe the game just codes that oddly, I dunno.
But I guess the rock/paper/scissors theory is off- more of a tendency than an actual rule. I’ve seen outer attacks cause the red flash vs inner ones, but not the reverse. It does make sense that I’ve most frequently seen red flashes happening between attacks of the same type, though- it seems more likely that there are attacks which appear to be in a different position than they are actually coded, and they are actually of the same type as the move that they’re beating.
Today has been a good day. I owe you a beer, or a Coke, or whatever your thing is.