Hi Graboid, sorry for such a delay in getting back! First chance I have had to have a proper look at this. I have followed your steps and I am 100% wired up according to your wiring diagram. I add the usb quirks line and reboot. On rebooting, none of the buttons work at all. I have tried pushing select and x together (as well as every other combination of two buttons) and cannot access the retroarch gui. I tried hitting f1 on the keyboard too and this won't do anything either so I can't see any way of accessing the retroarch gui to even see whether it now sees it as two controllers. However Lstest does show it as two controllers...

any ideas? really appreciate your help and hopefully I can get this running! I am using a pi 3 and retropie v 4.1 (have tried older versions too). What are you using and what version of retropie are you using?

Hi there!
I'm only replying here to give you the solution I found to get my THT THT 2 Player Encoder working on Raspberry PI3, and Retropie 4.3.
I can say the usbhid.quirks=0x16c0:0x05e1:0x040 command didn't work for me and after hour and hour of trying I opened the cmcline.txt via the retropie

cd /boot/
sudo nano cmdline.txt

Before that I did it only by pulling out the sd card putting in to my pc, changing the cmdline.txt with the windows editor with one space at the end of the line and....... Never worked...

After I took a look in the cmdline.txt via retropie I saw that the "usbhid.quirks=0x16c0:0x05e1:0x040" had two spaces between the last command and was also in the second row of the file. I wonderes an changed it. Bam! That was it! Now 2 Gamepads are detectet and eveything is fine for me. May someone will have the same issue with the cmdline.txt file without recognizing it.

Have a nice christmas!