When you do setSleep is used, the selenium instance will execute with regular interval specified.
Eg.
selenium.setSpeed(1000);
selenium.click("Element 1");
selenium.click("Element 2");
selenium.click("Element 2");
The click will execute at the interval of 1 sec.
Now if you use Thread.sleep.
Eg.
selenium.click("Element 1");
Thread.sleep(1000);
selenium.click("Element 2");
selenium.click("Element 2");
There will be just one one second interval between click of an element 1 and element two.
So, setSpeed is roughly equivalent to
selenium.click("Element 1");
Thread.sleep(1000);
selenium.click("Element 2");
Thread.sleep(1000);
selenium.click("Element 2");
Hope that answered!