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I have always formatted USB sticks (aka flash or jump drives) to the default settings that Windows suggests.

Do these settings provide the best performance? Under what situations should they be customized (type of file being stored, how often it is accessed, etc)? Is there any rules for which settings to choose (if the drive is larger than 1GB use X setting, etc)?

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It's all math but there are roughly 2 main things that need to be understood:

  1. NTFS can store files larger than 4GB so if your flash drive is 4GB or less then choose NTFS anyways because the FAT file system suffers from worse performance issues due to fragmentation
  2. The Allocation Unit Size specifies how big the chunks should be that your files get split into (default is 4KB). So a 2KB text file will use up 4KB anyways but a 16KB text file will break into 4 4KB chunks

So choose the allocation unit size based on how big your files will be. If you are storing all MP3s and they are 2-10MB in size then choose the highest Allocation Unit allowed.

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FAT partition tables are good for legacy reasons (i.e. Windows 98, or any OS that doesn't support well NTFS) and they don't store any permission settings whatsoever. The overhead regarding cluster size is negligible, although the rule of thumb pointed is accurate. –  Doktoro Reichard Oct 25 '13 at 21:17
    
Yep, I absolutely agree with @DoktoroReichard so just make sure to choose your filesystem and allocation units accordingly with whatever you plan on doing with the flash drive. –  MonkeyZeus Oct 26 '13 at 2:57

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