With a software mouse if the server kags your mouse will lag to. It will become slow and unresposive at times. There's an option under the ffxiv config to turn it off try it and see the differences for yourself.
What exactly is the difference between hardware mouse and software mouse?
I'm sorry, I try not to be directly confrontational, but I cannot in good conscience let this go. Software mouse has absolutely nothing to do with the server; in fact, it is possible to have a software mouse with no lag, just not likely in FFXIV for a while. A software mouse means that the graphics module takes input from your mouse and paints the mouse on the screen in the same pass as the rest of the game. That means that any drop in FPS due to CPU or GPU lag is going to cause massive stuttering on your mouse. Hardware mouse, on the other hand, is handled by the OS thread, which has a higher priority, meaning even if your game looses frames, the mouse will still paint correctly.
This is actually something that has bothered me in FFXI for a long time, people complaining about lag due to congested servers in crowded areas, then describing what is clearly a laggy GPU. There is a huge difference between server to client latency and loosing frame rate from your GPU.