Rotary Encoder E6B2 - Braided Shield and Grounding Conventions

Similar to the post here, I am having some trouble interfacing with a pair of OMRON E6B2 rotary encoders.

I've encountered very large noise errors in encoder readings when attempting to tie SMELD (braided shielding) and Blue (0V) to a common ground on the Arduino (as compared to leaving SMELD unconnected).

The note posted here seems to address a similar issue.

Looking at Figure 4 of that note, can anyone with more Arduino experience comment on whether tying SMELD and Arduino GND both to some external earth ground will solve the issue? Or should I look elsewhere to explain noise in my tick readings?