When the Software (XON/XOFF) Flow Control setting is selected, the Flow Control is managed by software in the 'receiving' communications equipment. The software monitors the amount of incoming data and when a certain threshold is reached, it sends an XOFF signal to the 'sending' communications equipment.
When the 'sending' communications equipment receives the XOFF signal, it stops transmitting data to the 'receiving' communications equipment.
When the 'receiving' communications equipment has processed the data in its buffer, and is ready to receive new data, it sends an XON signal to the 'sending' communications equipment.
From the moment the 'sending' communications equipment receives the 'XON' signal, it can be used to transmit data to the 'receiving' communications equipment again.
The XON and XOFF signals are transmitted via the data connection between the 'sending' communications equipment and 'receiving' communications equipment.