You need to work on that, it's just as bad as when you're trying to get on a horse and they walk off. It could turn into something bad like him rushing you or running into something. I would not let him do that.. teach him to wait for you to tell him what to do, rather than make the decision himself.
As for your question, I would use the entire arena, and work on keeping your horse on the rail. He might be out of lunging shape (running a circle is a lot of work) so you want to start off small, 10 minutes of walk trot, little bit of canter, and build up. Also work on some ground work. Teach your horse when you push where your leg would go and say a word like "over," they move sideways away from you. Then after they understand that, by pointing the whip at the horse's ribs (not touching them) and ask them to move over, he will know to not come into your space. It may take awhile but you can't let the horse cut corners.. OR change directions without being asked. Teach your horse to stand and practice walking a little bit away BEFORE the horse makes the decision to move. Reward him for time spent being still, and he'll catch on and eventually learn to "ground tie."
There are tons of threads with amazing roundpen and lunging information as well as ground work.. good luck :)
Last edited by Skyseternalangel; 12-16-2011 at 01:02 AM.