This feature is used to enable an interface-local proxying of ARP requests. Activation will make the router answer all ARP requests on configured subnet, even for clients that shouldn't normally need routing.
This is primarily used when hosts in the connected subnet are L2-separated with features like Private VLAN or similar.
An example for a situation where this solution may be required is in a residential broadband network.
In such a network it might be a security concern if users have direct layer 2 connectivity since this might open up for ARP spoofing via gratuitous ARP and other possibly malicious activity. Therefore one might want separate the residential customers from each other with Private VLAN or other means and use local proxy ARP to direct all traffic between users over the routers layer 3 interface.
Interaction with other features
Local proxy ARP requires that proxy ARP is active. ICMP redirects will be disabled for an interface which is configured with local proxy ARP.