130ms is very high considering the precision timing needed on that map. Normally the game isn't very strict keeping your location between the server and client perfectly synced, by it does do a sanity check on your movements when the client updates your position.

The blast network network map design has 2 traits you don't see elsewhere in the game. Its a grid made entirely of sharp 90 degree turns, and all dropped bombs have to be centered on the square. When the server tries to verify your movements, it checks to see if the place you were seen last and the place the client is saying you are now can be reached in a straight line and within a certain distance (or maybe speed). If the gap between updates becomes too large (ie high latency), turning a corner at high speed will cause the server to see you walking into a solid object, and will tell the client it needs to resync its position. The result is you getting rubber banded into a spot until numbers start lining up again. You get the exact same problem attacking wolvers with weapons that pull you forward, like the flourish... which leads into the second problem. Since bombs have to be centered on a square, and as a rule, when bombs are placed the knight comes to a full stop and places the object at his feet, the game will snap you into the center of a square during placement. If your doing this on the run, the desync can become bad enough that the server will forcibly correct the client and put you back where the bomb is. This is made even more complicated since bombs are now collidable objects (think Vanaduke getting stuck).

And for the record, the server is hosted in the Amazon EC2 cloud somewhere in Seattle, WA. While it does function well enough (and probably cheap), I still have reservations about using cloud computing for this kind of server hosting. Low Latency is hugely important in game servers, and the cloud is basically a giant cluster **** of data movement and shared processing time.

The latency is actually really consistent with the time of the day.
Here's what it looks like during an average match around 9-10pm pst:
http://www.youtube.com/watch?v=lkYOWJ0eukY (sorry for the abysmal quality, I was massively limited on diskspace)

Note that this includes footage from two different matches and comprises of cherry-picked moments for the most visible moments but you can be assured that the rest of the game was not any more playable.

If you ever tried doing a trace route to the zone servers, its seriously deep in the cloud. After level3, ICMP kind of disappears for a few hops, then shows 2 hops before disappearing again.

Bought a new router.
No more problems.

I'm having the exact same problems you are. I have been able to play SK without any problems whatsoever (except for the rare lag spike that lasted only 5 seconds or less) but since they added the Coliseum/PvP, the entire game is now virtually unplayable for me. I always have hardcore movement lag everywhere, Haven, the Clockworks or the Coliseum. When I attempt to go anywhere, Clockworks/Coliseum, whatever, the lag just gets worse and worse until I get disconnected from the server. Immediately after this happens I go to speedtest.net (also selected a server in California because I think thats where the closest SK servers are, I live in Western Canada) and my internet speed was 1.3 Mbits/s DL and 0.75 Mbits/s UL, Ping was 84 ms. Now 84 is kind of high latency, but earlier tests to the same location in the U.S. were roughly the same, and that was when I didn't have problems with lag in-game. I could go on forever but I think I'm going to stop playing SK until OOO MAYBE comes up with a fix for this, because I know that you and me both are not the only ones with this problem, because all of my friends are as well.

Latency isn't the main problem, the coding is.
For shielding against an attack, you have the round trip from latency, as well as processing time for the game to say you shielded, for other things, it is just how they do it.
To perform an action, it needs to go to the server and be processed by the server. OOO does not trust you enough to let you play the game properly.

No I haven't played a game where that happens (where it isn't meant to).
The only time that will become a problem for the people who want to play fairly, is during PvP. During this time, if people are hacking, they can be reported, and banned.
During other times, the only thing that would happen is people don't die when they are meant to, so they ruin the game play for themselves, yet others can still play fine. If they go in a party, they can still be reported for hacking.
They would not be able to get crowns or energy or materials or anything else that they can't get now, they can keep that on the server, but walking and shielding (not shield health) should be on the client. The knights health and their shield health and all the drops and the crowns and energy can still be on the server.

Would I want that on Spiral Knights? No, however when it does happen, that player can be dealt with, and it will be a rare occurrence. However, occasionally having that happen would be far better than continually having the game screw up and place me where I shouldn't be, or waiting to shield until I have been hurt.
Having people hack is the better option.
Hacking will ruin the game for the person hacking, and the people in the same party as him (which is essentially only significant during PvP).
The current system ruins the game for everyone except those that can still manage to hack it.

It is a good design for OOO as it is more likely to have people die and need to spend energy to revive, so they can't play as much using up server resources, or they buy energy.
It is a horrible design for the players.

Thats not how a ping works. When your measure between 2 points, you need to measure against your intended target, not a random point in the network. That server is in the upper north east, and close to the Level3 backbone... so it should respond fairly quickly if your nearby. While not far off, the EC2 cloud hosting the SK servers is near the Virgina/DC area and you should be testing your way through to that destination.