Or> Michael, can you educate me a little here, how does this
    Or> loopback works? is there a special case within the HCA saying
    Or> "if QPX.DLID is MY LID then move packets directly from QPX.TX
    Or> queue to QPY.RX queue" or is it something else?

Yes, see the compliance statement C17-18 on page 1028 of the IB spec:

  C17-18: HCAs shall allow packets with a destination address the same
  as that of the port on which the packet is issued. Such a loopback
  packet shall not go onto the wire.

 - R.
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