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As you can see, trading or speculating in grain by forward contracts can be cumbersome, inefficient, and restrictive. The Chicago Board of Trade, established in 1848 with 82 members, was formed in large part to encourage a smoother transfer of forward contracts. The existence of a centralized marketplace highlighted the need for streamlined trading procedures. Over time, these forward contracts acquired specific standards for quantity, quality, commodity, delivery place, and date. They, thus, became similar to modern futures contracts—one of the most flexible, innovative pricing mechanisms in the history of commerce.
Although the Chicago Board of Trade was charged initially with promoting commerce in general, one of its first accomplishments was to set standards for wheat, as well as to implement an inspection system. By 1865, following years of volatile global and local price action due to the Crimean War and, later, the U.S. Civil War, the exchange had adopted rules that defined the first real futures contracts. While modifications and additions were to come, the modern futures contract had been born.
Essentially, futures contracts differ from forward contracts in several key ways. First, futures contracts are traded on exchanges, while forward contracts are two-party agreements between a buyer and a seller. Second, futures contracts rely on standards that determine the product being delivered will be of uniform quality. Also, a futures contract sets a specific quantity to be traded, while the size of a forward contract is set by the buyer and the seller.
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Forward contracts require counterparty vigilance. Since futures are traded on an exchange, buyers and sellers needn't worry whether or not the person they trade with will make good on the contract. That's because the exchange clearinghouse guarantees that the other side of the trade will be fulfilled if either the buyer or seller defaults. There's no clearinghouse to stand between a buyer and seller in a forward contract. That means both parties in a forward must keep close track of their trading partner's creditworthiness.