I’m struggling with the same issue, but in cubase 10.
This mode option doesn’t really fix it, because it applies midi merge to midi recording in key editor and in “normal” recording.
But In cubase 8 and earlier midi recording worked like this:
When recording midi in project view: creates new part.
When recording in key editor (with key editor open) it would merge midi notes that were just recorded while the key editor window was open into that part.