I'ma just explain this whole-ass thing because I don't feel like dragging you through it bit by bit. You will use this explanation to refine your expectations for how to parse anything I write and my expectations for how you need to reason to keep up with me. 

Further supporting information can be found in chapters 12, 16, and 18 of WKR and the first two chapters of the short story Lion's Teeth but is not critical info. Just background texture for what state Sherlock is in and shows you how extensive this shit is. This scrap is some nonsense written in a few hours to explore the fun of the politicking alongside some stupid mutual gay panic and the juxtapositional of that, collapsing it to "meaning" one thing or another is missing the point.

Ok. So. 

January 2000. Mycroft did not come home for hols because he's just finished up at Cambridge and is busy being a very important 22 year-old starting out his intelligence career during Y2K and the Yeltsin-Putin transition. Too busy to come home. During that period, Siger got Sherlock to nick ten quid off him for cigarettes as a pretense to break his left wrist in order to remove the loophole Sherlock had been using to avoid being around the boarding house enough to collect intel on his schoolmates - violin. Siger set it up such that Sherlock would blame himself for that outcome and thus would be less likely to pick up the professional violinist idea again once the wrist healed. Just Siger things.

At school: During first year Sherlock had a patronage situation with a lad named Micah Allen. Many rumors, some of them true. Sherlock did not relay any of this to Siger because he would rather die thank you. Seth Davies, the son of one of Siger's diplomat acquaintances, overheard his dad saying that Siger has a spy in Holland House (their boarding house). Seth then extrapolated this because he was 13, and started a rumor that Sherlock was spying on everyone in the house (technically untrue - he has assigned targets) and that the situation with Allen was Sherlock deliberately manufacturing leverage (very untrue, Sherlock was 12/13, of course he was not deliberately doing anything, and also he never recorded or reported anything that may or may not have happened). Seth Davies then goes on to be a recurring bully of Sherlock because he is doing the teenage boy thing of demonstrating that he's not cowed by this alleged spy. He really should be more cowed by the alleged spy but that's a future plot from the current moment. 

Also at school: Sherlock has been avoiding Henry Bartlett ever since first year when Henry was nice to him once and Sherlock did not want to reveal that Henry is gay as all fuck, because Sherlock realizes on some subconscious level that this particular deduction risks recoil back at himself. He also thinks Henry is cute. His solution to this catastrophe is avoidance which he classifies as being the kind thing to do in order to avoid reporting anything about Henry to Siger. He does not ask himself why he doesn't do this for any other boys. Henry avoids Sherlock for much the same reasons minus the spy stuff. They have existed in this equilibrium for about two years. Not an easy task when their rooms are right across the hall from each other. 

Independently of all that: Arthur Bartlett has been informally the "Siger whisperer" since sometime in the late 70s when Siger first went double. Arthur is some manner of liasion between the political and espionage worlds, a fixer of sorts, though his exact title is not really important. At present moment he has asked Siger to produce some piece of evidence which will implicate someone whom Arthur is targeting politically, with a list of requirements. Arthur has also ended up in a position of being a sort of mentor to Mycroft, because he is apparently now just the Keeper of the Holmeses. He is ambivalent about this. He does like Mycroft quite a bit more than Siger, though, so there's that. 

Siger: went through his prolific kompromat/receipt stash and found that a particular old greymarket operation happens to satisfy all of Arthur's reqs, and also happened to have featured Sherlock as the primary field asset for the first leg of the operation. This is also (unmentioned in-text but driving the reactions nonetheless) the operation where Siger couldn't be arsed to organize exfil for his ten year-old and got the kid captured by the Mossad instead. Very convenient; Israel has to send the trained British child home, Siger learns about their intake/detention/command structure, all related intelligence services get delightfully inconvenienced. Splendid. He neglected to inform Sherlock that being captured was the goal, however, and the boy executed stale orders to resist/escape capture or die. This resulted in a report which starts out vaguely horrifying and gets progressively worse as one reads through everything this ten year-old did in Shin Bet custody. Arthur reads the overview first, then once the boys leave he is told to read the rest, does so, and gets the profound horror of Siger cheerfully explaining how one accomplishes that sort of CQC and resistance skill in a young child. Hence the threat update. Siger is having a wonderful time.

Furthermore, Siger is only doing this right now because a) he spotted a funny way to let Arthur know he's had a collection asset on Arthur's kid for two years, hah. b) the Yeltsin-Putin transition has made having an Anglo-Russian trained teenager especially lucrative and Siger is demonstrating a very useful asset to Arthur during a window where Sherlock is incidentally much more tractable than usual (a non-recently-maimed Sherlock would have a higher likelihood of telling Siger to go fuck himself, not useful). c) it is easy to let Arthur think that Mycroft finding out is materially bad for Siger. It isn't. Mycroft has a weird mental block on the thing anyway and subconsciously off-ramps any evidence about his brother's operational usage.

Mycroft: does not know. Sherlock thinks Mycroft knows but that the family policy is not to be vulgar about it by discussing such things openly. Siger knows Mycroft doesn't know and finds this both puzzling and bemusing. Arthur apparently thinks Mycroft knowing would materially inconvenience Siger. Probably not. Siger is content to let him think that it might because that is a better leverage field. 

What else? Oh, the horse is like that because 5-10 year old Mycroft was given a colt to raise but kept feeding it sugar cubes because Mycroft hates being hungry and didn't want his horse to be hungry too. Cicero learned to mouth Mycroft gently as a signal that he wanted more snacks. This is why Sherlock isn't concerned about Henry being bitten badly enough to do damage - Cicero isn't violent, he's just an asshole. Sherlock really does hate horses because Cicero bit him when he was six and he holds grudges like a motherfucker. 

On the "you don't hate me" question - Sherlock is just asking that because he's trying to sus out if Bartlett will rat him out for the cigs, asked in an awkward way because he's 14, then tried to save it and bit his lip because wtf, terrible wording, he's being weird at Bartlett. Henry then accidentally answers with "you're fine" which is much too close to "you're fit" so *he* then awkwardly tries to save it because teenagers.