It makes it smooth to move the mouse but slowing the reaction because it's basically delaying the response. Not really good to use at games that requires lots of reflex and response. I only use it for single player mode and it also smooth out the framerates. I set mine to medium mostly.
Mouse smoothing came from the time of mechanical ball mouses (mice?), because of their poor spacial resolution, i.e. if you move the mouse from left to right in FPS, you would see that the rotation of your view is performed in "jumps", which is an artifact of low resolution sampling of mouse position.
If you have good optical mouse, there is no need to smooth it at all.