If you're short-selling, naked or not, GS is not the party you're selling to. GS is the broker. They execute the sale on your behalf, because they have access to the market. The $10 comes from two other third-parties that GS finds on the market.

I think the difference is that no money changes hands.

Normal shorting is when you "borrow" a share from someone else with the promise of giving it back at a given date. You sell it and pocket the current price, then try and buy back the share in the future at a lower price, pocketing the difference.

In reality, money never changes hands during a short (other than the cost of setting up the short). The short is only due at the end of the borrowing period (or before if a margin call happens).

So in the case of a naked short, it's more of a bet on GS part. They don't located a share to "lend" you, they just say "ok, pay us a few dollars and you have a short". If the stock goes down, GS gives you the difference, if it goes up, you pay up.

It's basically a bet and GS is the counterparty.

This is my understanding of how this works:

When you instruct GS to sell the share for you, GS actually went to the open market and just sell the share.

They are supposed to deliver the share at some time later, when they have found the share to borrow. However, they can do nothing and wait for the deadline to come. If the price drops, they will buy a share to deliver the previous sell order, and make a new sell order at the same price to "extend" the delivery deadline.

I'm guessing here - but I think GS were running this the other way round. _They_ were selling short, and taking your $10 if the stock price dropped, and saying "Oh sorry, that trade failed" if it didn't.