The grease may burn a bit, I doubt you would smell it. A noticeable spark means the switch probably has a problem. Make sure it's fully engaged to one position or the other. If it's an old switch, it's possible it has arced many times and burnt the PCB material the bottom of the switch is made of. Once it burns, it carbonizes and conducts electricity, and will continue to arc progressively worse.
I'm assuming it's a speed switch. Otherwise, why does it have three connections?
Even if it's a NOS switch, the old grease inside might be gummed up and causing this issue. Might want to open it, clean it thoroughly, scrub the contacts with a scotch brite pad, apply a light coating of grease, and reassemble.