Hey ,
I found this bit of information from about the merging of sprites and the suggested workflow, as he is the one who implemented the feature.
“Sorting will be done as a whole unit. If you have some translucent foreground sprites and some translucent background sprites, you probably don’t want to group them together. With the sort button they’ll sort correctly relative to each other, but a translucent player in the mid-ground can’t pass in between the two of them, it’ll either draw in front of both or behind both. These kinds of sorting issues only apply to Translucent materials, Masked materials don’t have the same issues but they only work for binary (0 or 1) opacity.”
I am bringing this to your attention because I noticed in your video, you have Translucent Sorting Priority set for the selected sprites. This is more than likely the cause of the issue, but in order to confirm you will have to do some testing on non-translucent sprites and run a comparison.
Cheers,