Squid spawning causes server to lag.
Steps to reproduce:
1. Fly high above an ocean around height of 200.
2. Wait at least a minute.
3. Fall down and see squid spawning and despawning rapidly everywhere
At height 200 above a level 46 ocean, the server becomes laggy. The longer you stay above the ocean, the more the squid lag seems to "accumulate". Eventually the lag will dissipate and the squid spawning will go back to normal. An aqua affinity helmet will help you see all the squid spawning/despawning. If you have trouble reproducing this I can show you on my server if I am online.
IP Address: (whitelisted/offline)
These error messages start to pop up if you stay at the 200 height for a while(10 minutes or greater). While an indicator of general lag, the server is fine any other time except when at 200 height above ocean.
31.12 06:09:28 [Server] INFO [06:09:28] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2414ms behind, skipping 48 tick(s)
31.12 06:09:09 [Server] INFO [06:09:09] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2180ms behind, skipping 43 tick(s)
31.12 06:09:03 [Server] INFO [06:09:03] [Server thread/INFO]: Saved the world
31.12 06:09:03 [Server] INFO [06:09:03] [Server thread/INFO]: Saving...
31.12 06:09:03 [Server] INFO [06:09:03] [Server thread/INFO]: Saving is already turned on.
31.12 06:09:03 [Multicraft] Auto-saving world...
31.12 06:08:51 [Server] INFO [06:08:51] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2156ms behind, skipping 43 tick(s)
31.12 06:08:36 [Server] INFO [06:08:36] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2383ms behind, skipping 47 tick(s)
31.12 06:08:21 [Server] INFO [06:08:21] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2091ms behind, skipping 41 tick(s)
31.12 06:08:06 [Server] INFO [06:08:06] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2775ms behind, skipping 55 tick(s)
31.12 06:07:49 [Server] INFO [06:07:49] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2298ms behind, skipping 45 tick(s)
31.12 06:07:46 [Server] INFO [06:07:46] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 14709ms behind, skipping 294 tick(s)
31.12 06:07:15 [Server] INFO [06:07:15] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 4657ms behind, skipping 93 tick(s)
31.12 06:07:10 [Server] INFO [06:07:10] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 19226ms behind, skipping 384 tick(s)
31.12 06:06:37 [Server] INFO [06:06:37] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 7385ms behind, skipping 147 tick(s)
31.12 06:06:22 [Server] INFO [06:06:22] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 10029ms behind, skipping 200 tick(s)
31.12 06:05:55 [Server] INFO [06:05:55] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 5317ms behind, skipping 106 tick(s)
31.12 06:05:33 [Server] INFO [06:05:33] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2275ms behind, skipping 45 tick(s)
31.12 06:05:11 [Server] INFO [06:05:11] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2067ms behind, skipping 41 tick(s)
31.12 06:04:49 [Server] INFO [06:04:49] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2003ms behind, skipping 40 tick(s)
31.12 06:04:17 [Server] INFO [06:04:17] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2059ms behind, skipping 41 tick(s)
31.12 05:53:54 [Server] INFO [05:53:54] [Server thread/INFO]: Saved the world
31.12 05:53:54 [Server] INFO [05:53:54] [Server thread/INFO]: Saving...
31.12 05:53:54 [Server] INFO [05:53:54] [Server thread/INFO]: Saving is already turned on.
31.12 05:53:54 [Multicraft] Auto-saving world...
31.12 05:52:10 [Server] INFO [05:52:10] [Server thread/INFO]: [A_Priori: Set the time to 0]
31.12 05:51:55 [Server] INFO [05:51:55] [Server thread/INFO]: [A_Priori: Set the time to 0]
31.12 05:51:03 [Server] INFO [05:51:03] [Server thread/INFO]: <§9A_Priori§r> ok
31.12 05:50:50 [Server] INFO [05:50:50] [Server thread/INFO]: Galaxy_2Alex left the game
31.12 05:50:50 [Disconnect] User [05:50:50] [Server thread/INFO]: Galaxy_2Alex has disconnected, reason: TextComponent{text='Disconnected', siblings=[], style=Style{hasParent=false, color=null, bold=null, italic=null, underlined=null, obfuscated=null, clickEvent=null, hoverEvent=null}}
31.12 05:50:46 [Server] INFO [05:50:46] [Server thread/INFO]: <Galaxy_2Alex> I'll do some testing on my server now
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Cannot confirm, the entity count is somewhat flickering at height > 300, but the server doesn't lag.
Please force a crash by pressing F3 + C for 10 seconds while in-game and attach the crash report ([minecraft/crash-reports/crash-<DATE>-client.txt|http://hopper.minecraft.net/help/finding-minecraft-data-folder]
) here.
I'll be on my server for the next hour or so if you still want to see it in action....might possibly have something to do with my world?
Crash report added.

Confirmed
After staying some minutes at height 200, the server starts to lag without any notes in the console.
Also noticed weird spawning when falling down afterwards.
I found that staying at height 200 for an extended amount of time (>10 minutes) may produce warnings

Is this still a concern in the current Minecraft version? If so, please update the affected versions in order to best aid Mojang ensuring bugs are still valid in the latest releases/pre-releases. If this has been done, we can reopen the issue.
Keep in mind that the "Resolved"-Status on this ticket just means "Answered", and that we are waiting for further information on whether this issue still exists or not. We will reopen it as soon as the requested information has been delivered.
I'm having this problem on a server running 1.8.3
When I'm at y=190 and above and over an ocean biome the f3 debug screen Entities (E:, I:, All: ) reading goes haywire, placing and mining blocks is very laggy. Dropping down to sea level I see squid spawning and despawning rapidly until the server and client are back in sync.
y=80 above ocean, everything fine
y=185, squid despawned as expected.
Entities count goes haywire.
severe lag, those torches hung in the air for over a minute.

This issue is known by the modding community and there's a mod completely fixing it in 1.7.10 (yes it happens there also). Afaik it removes all squids that are more than 64 blocks from the player and blocks new squid spawns at the mentioned area. The code for the mod is open and can be used to fix it.
updated to 1.8.4, still a problem

Is this still an issue in the current Minecraft Snapshot 15w49b or later? If so, please update the affected versions in order to best aid Mojang ensuring bugs are still valid in the latest releases/pre-releases.
I am still getting this exact behavior in Minecraft 1.8.9. I can't build a tower over the ocean taller than level 189, due to the lag created by this bug. The lag does indeed accumulate. The longer you stay too high, the longer you have to spend back at the surface waiting for everything to catch up. While it catches up, you can see squid appearing and disappearing all over the ocean. Note that you can also see the "All" number in the debug screen go crazy when you cross into level 189.
I used the doMobSpawning game rule to confirm that the spawning indeed causes the issue. Disabling spawning stops the lag.
I created a video illustrating the problem and uploaded it to YouTube (no sound, but watch for the delay on the bow):
https://www.youtube.com/watch?v=N2PkGz5mGLk
In 1.9.1-pre3, squid appear to no longer spawn in this pattern over the ocean. But in The End, Endermen do at about 133 blocks from the ground.
See capture: http://cl.ly/3P2K2P2M0Y31

Resolving to MC-91621 since that ticket is more general.
I don't think this should be resolved to MC-91621 unless the description for that bug is changed to include non-hostile mobs, or at least squids.
Well Jonathan, is possible that the big that causes hostile mobs to lag also causes non hostile mobs too lag also.
Nicholas, I agree, it's clear they are likely related, it's just that the description of MC-91621 doesn't include/match the behavior seen here in MC-43980: hostile mobs around height 125 vs. squids (passive) around height 180-200. Also MC-91621 doesn't mention anything about the server lag it creates, so I figured a description change was in order if they were to be combined.
Maybe I should bring all this up on the other bug? Sorry, new to this.

Added this ticket's description of MC-91621
Server will be on a whitelist while I am offline.