Clustering level is a minimum number of matches (clustering degree) required to trigger grouping of two keywords. For example, you've selected a grouping level 2. The tool will take your keywords and send search queries to search engines to compare their search results. If there are two matching search listings in SERP, the tool will band up such keywords together.
A chance to have 1‑2‑3 search listing matches in SERPs is much higher than having 9‑10 matching documents. That's why clustering with a lower clustering level produces fewer groups with more keywords in every group. On the opposite, if you select level 8‑9 or 10, you'll get many groups with a few keywords in every group.