Which command are you running for this display? Based on the screen capture, when you are hovering over that element, it appears to be a "color Coded Elevation", which is a triangle display, so it will display all shapes as triangles for the different colors. Since you have the View Properties > Display Style to show as a 'smooth', it fills these shapes and you may not see exactly what it is displaying. I have attached a screenshot to show an example. So this isn't a contour display and the lines will follow the edges of the triangles, appearing to be jagged but this is correct.
The only Smoothing option we have is on the Contour display (Surface > View Surface > contours). See the following post regarding the native display of DTM contours and displaying smooth contours with the OpenRoads Terrains as well.
