You are configuring an Application Load Balancer.

To connect an Application Load Balancer to on-premises resources via Dedicated Interconnect without traversing the internet, you must use a hybrid network endpoint group (NEG). Hybrid NEGs are specifically designed for connecting Google Cloud load balancers to on-premises or other cloud environments via hybrid connectivity solutions like Cloud Interconnect or Cloud VPN. The proxy-only subnet is essential for the load balancer's proxies to communicate with the backends.

Exact Extract:

"A hybrid NEG enables you to use an external HTTP(S) Load Balancer with backends that are outside of Google Cloud, such as your on-premises data centers or other cloud providers. This is typically used in conjunction with hybrid connectivity solutions like Cloud Interconnect or Cloud VPN."

"When using an external HTTP(S) Load Balancer with hybrid NEGs, you must configure a proxy-only subnet in the region where the load balancer is deployed. This subnet is used by the load balancer's proxies to reach your backends."Reference: Google Cloud Load Balancing Documentation - Hybrid NEG overview