@mitu I've only been tinkering with it so far, but this doesn't seem to be the case. When I create such a file, I still have to drill down through the subfolders to play the game, despite the xml file pointing directly at the rom. I do believe i had that option checked, but maybe I'm misremembering. I will test this again.
[update] I just checked. I do have that option enabled. I am still have to drill down through subfolders. I also know it's working because other games are now missing though the files are present in the directory (but not in the xml). I'm assuming this is an intentional functionality (gameslist doesn't flatten directories).