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Assuming you're going to use Windows then ntfs can be a good idea, though I'd simply go with whatever default Windows suggests. Optimisation doesn't really exist like that; it usually determines how the files should be displayed in your file browser (Explorer) which is completely irrelevant to the way the files get stored.
So just uninstall the smaller games and format it to NTFS.
As far as problems-I still have it on my Win7 machine but that is over 5 years old and a bit of a slide show now in some scenarios. I have DCS and IL2 Stormovik (stand alone not STEAM versions) and they look gorgeous on my new rig.
Thanks both for your replies.
Never got to load it on the USB FLASHSTICK. Got about 7.1 GIGs then I got constant Critical Error popups on writing to disk (the USB stick) and download stops.
There is enough GOOGLE topics on it. Search "STEAM and USB Critical error"
Tried all the GOOGLE solutions-cleared cache, changing download server location-but did not reinstall STEAM [another recommendation].
Mileage may vary on other USB sticks but I don't recommended it on big games.
Put and Played ARMA III on my hard disk with no problem.
Other games on the Stick I tested - GRAVITEAM TACTICS: MIUS Front. Plays-but you get crashes to desktop when the fighting gets intense. But when it plays its is as fast as on a hard drive.
Clad in Irons: Phillipines 1898. No problem. Looks good no crashes in sea battles
Ah well I got a big USB stick to use as a WINDOWS backup.
Good luck if you try it.