Trouble understanding OEM HP Sensor CB781-80006 circuit
The encoder works 2.7 to 5.5V and has two collector output logic levels with built-in pullup resistors to Vcc.  Assuming it is using this
HP may have optimized the LED resistor for their supply. If that was 5V and you are using 3V then a somewhat smaller value is needed for the 1.6V LED (~20mA) in order to get quadrature square waves.
It appears to be a dual-channel rotary encoder somewhat like thumbwheel encoders in mice.