This is whether to use our built in proxy. We are using this internal proxy in Silverlight automation (it is automatically turned on while SL execution). Test Studio also uses this with FireFox in some cases.
In coded step you have the ability to intercept raw HTTP traffic under the cover. Using the HTTP proxy you can intercept an HTTP request originating from the browser before it is sent to the web server and/or intercept HTTP responses coming from the web server just before they reach the browser and are rendered by it.
Please see this article
Hope this helps.