He's talking about the option under data files in the launcher- you can tick "load loose files." I've never really known what it did either myself.
I didn't think it had to do with defragmentation though.
Now that I think about it some more....
That could be for Mods that have individual Graphics files. Normally the Data structure folder contains little or nothing unless it was added by a patch, or, mostly mods. The graphics data is contained in BSAs that are unpacked by the game as needed. Think of it as a compressed graphics file database and you are not far off. Some folks have tried unpacking the BSAs in hopes of the game running better with Oblivion and Fallout 3, but little comes of it.
So, it could have to do with mods. Let me move this thread over there so those folks can answer.