Bouncing at high cadences

I always set the saddle height so that my leg is at full extension/dead straight with my heel on the pedal- is this not the hard and fast rule that I had supposed it to be?

it's more of a very basic rule of thumb actually, because your shoe/pedal type and foot length make a difference.

also, track riders* tend to have a slightly lower saddle than mtb'ers and roadies, to facilitate smooth pedaling whilst seated at high cadences.

You shouldn't ever have a "locked" out leg, this causes your hips to be pulled into the pedal stroke and rock, which in turn upsets the balance of your core which contributes to the bouncing

*I include any fixed wheel rider for this example