It's all frame rate. I know it is....I feel it in my gut. >.>
The more you or your opponent's connection sucks (or both), the more you're going to lag. The lag comes from dropped frame rates, which means the slower the FPS (frames per second) the more choppy everything becomes to a point where it either looks like everyone is teleporting across the screen, or the game just crashes. (i.e. your connection is lost)
Since everyone shares a connection once they are synced for battle, you'll be able to tell if it's lagging almost immediately. (Somes I can tell on the character selection screen if the connection sucks or not)
For me the connection seems smooth most of the time, but it's like the frame rate drops just enough to where my reaction time is slower, my moves are delayed, or it feels like my inputs don't work properly. I'll be online, suck, go to training mode, everythings smooth, then back to online and its like nothing works properly again. Does anyone even know the fps for Mortal Kombat? (offline)