The signal clocks the decade counter divider 4017. The result is, that the outputs are switched sequentially from low to high. Output 9 (11) is connected to Reset (15) so that the counter starts again from the beginning when reaching output 9. Note that only the active output has high signal while all the others are low, that means ground potential.
Now the tricky part. Let's say output 1 is high. The current now flows through the series resistor and LED 1 (the diode parallel is in reverse direction and has no influence), through our network cable and then trough all other wires back to the tester, because all other outputs now have ground potential and all other parallel diodes are now in forward direction. That also explains why all pins of the termination socket are connected together.