It is called a traje de luces (suit of lights). These trajes are based on the flamboyant costumes of the 18th century dandies and showmen involved in bullfighting, which later became exclusive to the bullfighting ritual. Later adornments include the montera hat, elaborate embroidery and decorative accessories.
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Besides being the traditional costume, the tight-fitting clothing is for safety. If the matador wore loose fitting clothing he would be in much greater danger of having his trousers or jacket snagged on the horns of the bull, exposing himself to being tossed and, possibly, gored.
It is simply the customary costume worn by toreros and signifies his/her profession. It is called a traje de lucesor suit of lights.