During this phase you can toggle ship transponders from private mode to public mode, or vice versa.  A ship with a private transponder is visible on LRS only to the empires that you choose.  (See the Identify Ships phase.)  A ship with a public transponder is always visible on LRS to all other empires, known or not.  By default all ship transponders are set to private mode.
 
 
Allies: Allied empires always identify their ships to one another, regardless of their ships' transponder modes.
 
Abandoned Empires: Abandoned ships will always enable private transponder mode.