here are a couple more links discussing the various methods.
TronicsBench: Rotory encoder
Reading Encoder Switches
The first link goes into a good bit of detail on the issues and methods to resolve them. One thing mentioned is that the author believes the encoder on the KY-040 is a knockoff of the Bournes PEC11L encoder which states in it's Datasheet that Max RPM is 60. I would guess that the knockoff cannot match that 