I don't expect to have much votes for the 1st choice but I might be wrong
If merchants are considered more annoying than good for the game, what's the point of keeping them even in limited amount?
Regarding the guilds, I have already given some inputs. Guilds should be separated in 2 main categories: the craftmen and the merchants. Each of these categories should be also divided in subcategories such as butchers, bakers, blacksmith, etc on one side and like clothes, corn, weapons, etc on the other.
Both main categories should bring bonus and penalties and first of all, be always in competition. For instance, if the player wants to develop the corn merchants then it might improve the incomes from farm. On the other hand, he will also increase unrest somehow to represent peasants underpaid for their harvest and bakers paying the high price for their raw material.
That's just an example and it can/should be "polished" but at least, you've got the idea
On top of that, I think that a bank system woud complete the diagram.