The Skeleton Merchant is an NPC vendor that randomly spawns in the Cavernlayer. He will not move into a vacant house if one is available, similar to the Traveling Merchant and the Old Man. Enemies will not spawn near him and he will despawn when off-screen.
The Skeleton Merchant's stock changes at dawn (4:30AM) daily, and he does not need to respawn for it to do so. His inventory is dependent on the current moon phase.
He will throw Bones to fend off nearby non-skeletal enemies.
Unlike other NPCs, the Skeleton Merchant does not have a map icon. A Hunter Potion will highlight him.
"The world above is turbulent and chaotic. I like my bones to stay attached, as it were!"
Notes
Unlike other NPCs, he can neither be teleported using a Portal Gun or King Statue, nor drown. He can sometimes spawn in pools of water.
The Skeleton Merchant does not attack other skeletons, nor will they harm him via contact damage. Skeleton Archers, however, may shoot him by accident if the player is behind the Skeleton Merchant. This will only deal 1 damage to the Skeleton Merchant (or 2 if it is a critical hit). Furthermore, he will not attack bosses, although bosses may still damage him.
He and Skeletron still attack each other.
He cannot be killed by explosives deployed by the player. However, he may spawn in front of a Detonator or pressure plate explosive trap. Because of his bulkier appearance, players interacting with him may unwillingly hit the plunger on the detonator trap, killing both him and the player.
Despite similar mechanics, the Skeleton Merchant is not considered a town NPC in regards to reducing enemy spawns. He does, however, count as seven NPCs for the sake of enemy spawn limits when spawning NPCs, mechanically similar to bosses. In most cases this effectively blocks virtually anything from spawning, including critters. This creates a problem when the player is preparing to farm monsters in the Underground or Cavern layers. It is necessary to have a strong external damage source (lava, Boulders, Lihzahrd traps) to kill him to continue farming, or just go far enough for him to despawn.
This may not apply to 1.4 – needs further testing (ExpertSpider Caves still spawn Black Recluses when the Skeleton Merchant is in the safe box, at least).
If the Skeleton Merchant is nearby, Bunnies can spawn underground.
He does not spawn on jungle grass or corrupted blocks.
Tips
Selling items to him can help a player clear out their inventory in the middle of a long caving session.
If a player notices a Bunny in the Caverns, or a suspiciously low number of enemies on their Radar, it could be a sign that the Skeleton Merchant has spawned.
Trivia
The names Jack Sellington and Skellington are references to Jack Skellington from the 1993 American animated fantasy Halloween-Christmas film The Nightmare Before Christmas.
The Skeleton Merchant's scavenging animation
He can be seen retrieving a Slap Hand from a pile of bones in the credits.
The quote about Slime Oil is a reference to the "miracle medicine" peddlers of the 1800s, who were commonly called Snake Oil Salesmen.
The quote "The only things constant in this world are death and taxes, I've got both!" is a reference to Benjamin Franklin's famous quote "In this world, nothing can be said to be certain, except death and taxes."
The quote "You would not believe some of the things people throw at me... Wanna buy some of it?" is a reference to a young scavenger named "Squirt the Peddler" in the action role-playing game Diablo III. Squirt periodically asks the player a near-exact variation of this question, but refers to "things people throw away" instead of "things people throw at me".
The quote "Stay away from the spiders. They'll suck out your insides and leave you a hollow shell of a man. Trust me on this one." suggests the Skeleton Merchant was slain by a spider.
Even though he is not a town NPC, he will throw confetti during a Party.
He is one of two NPCs that does not have a map icon, the other being the Old Man.
He is the only NPC that always despawns once off-screen. The Traveling Merchant also despawns when off-screen, but only after 6:00PM.
Despite the fact one of his quotes says so, the Skeleton Merchant does not sell Maggots.
If the Skeleton Merchant is slain, no message would pop up to announce his death, unlike most NPCs.
Although Skeleton Merchant has a stated gender he cannot be teleported with the king statue.
The Bestiary entry for the Skeleton Merchant: "Most skeletons are out for blood, but not the Skeleton Merchant. He just wants to sell supplies, such as rare torches and yo-yo gear."
PC version, 
Strange Brew
Lesser Healing Potion
Spelunker Glowstick
Glowstick
Bone Torch
Torch
Bone Arrow
Wooden Arrow
Blue Counterweight
Red Counterweight
Purple Counterweight
Green Counterweight
Bomb
Rope
Gradient
Format C
Yoyo Glove
Slap Hand
Magic Lantern
Bestiary entry for the Skeleton Merchant: "Most skeletons are out for blood, but not the Skeleton Merchant. He just wants to sell supplies, such as rare torches and yo-yo gear."
