It's based on current rank and time spent in arena queue. The longer you spend in queue, the further away a potential matchup can be (by rank). This is why you'll sometimes see rank 5 players match with rank 1s, as well as other weird examples in lower ranks.
As for the weird mechs you see in low ranks, those are smurfs. Players intentionally dropping rank to capitalize on clan win bonuses and the occasional arena win gold boost. Matchmaking has nothing to do with item rarities, but I'd suggest maxing your torso and drone first.
WarrMachine's post in Does anyone know how does the matchmaking system work? was marked as the answer