Jon, sounds like you've mostly got it, but I've got a few more comments:
It has something to do with experiencing a part-throttle application (low-boost).
It also has something to do with keeping the RPMs constant.
What I don't quite understand is why this ends up boosting the timing up across the entire rev range, I thought that different RPM ranges were adjusted independantly. (The cause of uneven power delivery under some conditions even on a stock WRX?)
Apparently I was mistaken and there is one general timing advance. When knock is detected, it drops timing across the board.
This would mean that if you tuned the ECU to run too lean at one particular RPM and the engine knocked, the ECU would drop timing across the board even if the timing you're running is safe at other RPM points.
Feel free to correct me if I'm wrong.