I think AH is the better option. Stalls/vendors is also an option but I think this will require a lot of space, the area will become overcrowded and there will be a lot of spam on the screen.
Regarding items which can be traded, maybe it will be good if not all items can be traded so people will be much interested in going to dungeons. On the other hand, what will you do if you have items which you cannot sell and you don't need? Also, some items may require a lot of time grinding in dungeons and yet you are not guaranteed that you'll get them - maybe the particular items are not in the loot of your raid or you lose the roll for them etc.