[quote name='MarkMan']Pretty much.
If you want the best experience possible (response time wise) for a PS2 game, I suggest playing a PS2. If you're playing another game where 3 frames of lag won't affect you, then play it on the PS3. PS3 BC is still great for a bunch of games out there. I pretty much use the PS3 for all my PS2 games except fighters.[/QUOTE]
IIRC, the PS3 lag only applies to 480i games that are deinterlaced by the PS3 (e.g., over HDMI). Games that natively support 480p don't exhibit this problem when run in native 480p mode.
Unfortunately, KoF XI (US) doesn't support 480p.

Thankfully, Alpha Anthology does support 480p.
[quote name='Poor2More']I was wondering can you use the PS3 SC Arcade Stick with a 360? just wishful thinking[/QUOTE]
No, you cannot. (Well, possibly through an XFPS, but that's extremely buggy, laggy and twice the price of a 360 stick anyway.)