I have a mini caberet with only room for one player this is the reason for getting additional controllers so i can play 2 players
D'oh. Overlooked this because it was late and I'm thick.
You need to build one of these:

Sitting in the right kind of chair player 2 can play very comfortably with one of those on his/her lap, or put it on a TV tray or some other type of stand.
Personally, I would find it kind of frustrating and pointless trying to use a handheld controller to play a fighting game against someone who has the advantages of arcade controls. It wouldn't be fair at all, and kind of negates the point of the competition.
If you can't build one, a MadCatz TE is a very high quality option if you want Japanese parts, and there are plenty of custom stick makers who will sell you one with your preference of either Japanese or American parts.
DO NOT GET AN X-ARCADE! They use really crap Chinese knockoffs of Happ/iL parts. I started with one and found out the hard way.
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Anyhow, I stand all that stuff I said about controllers earlier, and can still be good to offer the option for both players to use them in genres that they're more suited for. All it takes is putting a USB port or two in the front of the cabinet.
Genesis/Saturn controllers are not so great. The only advantage is that the six face buttons work better than other controllers for six button fighting games, but it's still a poor substitute for arcade controls.
XBox 360 controllers are a good option. I prefer the shape of the PS1 controller, but you might have different hands and they seem to share all of the other advantages. Someone more familiar with them will have to judge the quality of the d-pad and analog sticks.