Quench is measured from the top of the piston to bottom of the head. For example, if you have a head gasket thats compressed thickness is .041", then your piston would need to be .006" above the deck to have a .035" quench.
The theory is that having too much clearance allows hot spots to develop causing potential power loss. Keeping a tight quench which many people will debate on how much is right, will create turbulence in the chamber which cools the top of the piston. I have seen alot of tests that showed anywhere from 4 to 9hp difference in a 350. Keeping a proper quench also helps prevent detonation. Its often said a 10:1 motor will ping less with a proper quench then a 9:1 will with too much quench. The overall standard for a v8 not using aluminum rods is .035". I have seen people argue anything from .025 to .050 is ok, in my opinion .025 is too small.
Ben