You also definately have room to add it right next to the yellow stick and let it share buttons with that one.
For that matter, every position on that panel has room to add a 4-way with the exception of the blue postion (trackball in the way, so you would have to scoot the station over an inch).
But my number one vote is still to put it right next to the player one stick and let it share buttons with player 1. That adds the ability to let you switch to the 4 way on the fly if needed (I do that with puzzle games sometimes). If you wanted to make it even, then add a 4-way to the player 2 spot also, and just scoot the slot over an inch to make the room. That would also allow you to play Crazy Climber, Karate Champ, and any two player simultaneous 4-way games that are out there (A lot of 2 player puzzle games play best with a 4-way).
Another change to that panel I would make would be to move the spinner down closer to the edge, like between the blue and yellow stations. (Reaching over other controls is a pain in the butt, and that panel is large enough where that should not be neccesary).