Update: Rockstar’s support page outlines the situation below with some additional context:
For Xbox 360, Grand Theft Auto V will ship on two discs; Disc 1 will be used for a one-time mandatory install and Disc 2 will be used to play the game. After the install, players will be able to enjoy both Grand Theft Auto V and Grand Theft Auto Online without any need to switch discs.
This initial install will require an Xbox 360 Hard Drive or an external 16GB USB flash drive with at least 8 GB of free space. If using a USB flash drive it must be at least USB 2.0 with a minimum 15mb/s read speed and formatted for Xbox 360 use. A new USB flash drive is recommended to ensure optimum performance.
Rockstar Games recommended against installing Grand Theft Auto V’s game disc to your Xbox 360 hard drive — it creates performance issues — but Digital Foundry has discovered a solution. Storing the installation disc’s data to your hard drive, and the play disc’s content to a USB drive, apparently smooths out any texture pop-in or lag problems. This allows your machine’s hard drive to worry about the install disc’s data.
Your best bet is, as usual, the bigger/faster the better — make sure your USB flash drive is at least 8GB. Double the space will go a long way in terms of making sure you have the size and speed necessary to make GTA V run at its absolute finest.
Check out the side by side comparison. While you’re at it, you can read IGN’s GTA V review or watch it below. What do you think? Did the USB trick work, or should we all just avoid installing the play data anywhere at all? Let your GTA V-playing friends know in the comments.