I have something of a personal stake in the issue, since I play both male and female characters in City of Heroes. But hopefully, unlike Chris Dahlen, I don't come across as a complete tool talking about it.
He's clearly well-meaning:
I have to believe any serious gamer would rather roleplay their characters than ogle them. Your avatar is your interface to the game, the vessel other players speak with, tend to and fight alongside, and I can't imagine making one just to leer at it.
But as the article goes on, it's clear that he can't get over how his character, and not he himself, is perceived by other players -- she kicks gnoll ass, but what's really most salient and interesting about her is whether she's pretty, cares about her outfits, how much flirting she does, how much romantic attention she gets. Take a look at that quotation again: she's a vessel, a means of interaction for him, an Other placed between him and other players. Compare the way he talks about playing a male character (my emphasis):
When I roleplay as a guy, I start with the way I see myself and project that into a 60-foot-tall caricature - and it never comes out the way I want. I keep asking myself: Am I the noble hero? A backstabbing thief? An insecure wisecracker? Do I want to be an alpha male, and if not, does that make me a wimp?
This really becomes clear towards the very end, where he explains why he thinks girls are cool (again, my emphasis):
Geek guys don't look up to the high school quarterbacks that smacked us in the locker room; we're more impressed by the complicated but confident geek girls, who actually talked to us in the library and always seemed more sure of themselves than the rest of school, no matter who teased them.
The cool girl isn't cool for herself; she's cool as an Other for the guys. Similarly, his character is neither an autonomous being nor an extension of himself in the game world, but rather just a doll he pushes around. Hence, although she has a female appearance, she's truly genderless -- indeed, she's completely bereft of any personality or self-consciousness whatsoever, a pair of boobs that can be instructed to kill gnolls.
In contrast, I consider all of my characters, male and female, to be my presence in the game world. I'm not just telling People's Fist (male) to run up and kick a guy in the face, or Sternschein (female) to launch an energy blast at a villain; I-as-People's Fist am the one doing the running and kicking, and I-as-Sternschein am firing those energy blasts. I think there's an interesting comparison to be made here with the way novelists often talk about their characters as having their own independent personalities -- a certain line of dialogue wasn't the novelist's free creation but what those characters actually said in that situation, fictional though it was. People's Fist isn't the same as Sternschein, and the two act very differently, but they're both still me, insofar as I am part of the game world.
The entire premise of this article is a mistake. If the issue were 'what happens to a female character in the game world?' or 'why are girls who kick ass cool?', then the real-world gender of the player would be irrelevant -- I'm sure women playing female characters have had to deal with undesirable online flirting just as much as men playing female characters, and we can ask why both women and men admire strong women (I bet the women don't just because those are the girls they hooked up with in high school). The real issue, I think, is the same as gender identity confined to the real world -- If you've lived your whole life as a woman, what's it like to spend time as a man, and vice versa? What does it mean to 'pass' as a particular gender? That's the particular experience of being a cross-dressing gamer that needs to be talked about.