There are 3 STEP Maths papers and it is not just Cambridge which requires them: Warwick, Bath, Imperial, ... all include STEP in their offers. (Although alternative offers can be made excluding STEP for those who take MAT or AEA.)
Each paper is graded S, 1, 2, 3 or Fail, with S being the highest. Those holding Cambridge Maths offers will typically be required to get specific grades in 2 papers. The offers however vary between students and colleges.
Given the above, it is evident that the grade boundaries on the three papers are not being custom fitted for Cambridge admissions: this would be ridiculously complicated, and completely inappropriate, given that the tests are being used by other universities too. There is some crude adjustment of grade boundaries, to ensure that the standards for getting S, 1, 2 and 3 are comparable year on year. But overall maths academics are pretty skilled at setting maths papers which produce the marks distribution that they desire so rather little adjustment is usually needed.
Cambridge Maths admissions feels harsh because for many of these students this is their first experience of rejection. But there are good arguments for using STEP for selection. Maths and Further Maths are too easy these days to distinguish between Maths candidates - the top 10 or 15 universities are getting A* candidates. STEP is pretty accurate at identifying the top mathematicians. STEP is taken later than MAT which has the disadvantage that the decision is made later but the huge advantage that the students are more mature and the papers cover all of A2. In my experience students from poorer schools do better on STEP than MAT, as students from better schools are often running ahead in the Autumn of year 13.
I think it is sad that British society is so obsessed with Oxbridge: a student holding Maths offers from Cambridge and another top university should be open to the fact that they could end up at either place and both will be great opportunities. And in reality this competition is just the beginning for most of these students: whether they wish to carry on in academia or not, they will be competing against many other highly-qualified candidates for top positions. They won't always get their first choice - that's life.