Okay, I'm finally done testing and it's definitely the PS/2 port.
If I plug the hotrod in the same thing happens, controls stick.
I bought a little generic PS/2 to USB adapter. The X arcade is even worse with this (as expected as I guess it just needs its own adapter), but the hotrod works perfectly. No hiccups whatsoever, so I can safely assume that it's a PS/2 port issue.
So the plan is to buy the USB adapter for the X arcade. Then I can have X arcade and hotrod plus the X arcade trackball all hooked up to my laptop at the same time. Nice!
You know it makes sense!