Update: Please see this post for further information.
The system is thus:
There is a rating, one that you cannot see, which will match you "against others of equal skill." This rating is different for each of the arena brackets. At the end of each match, the internal rating, the one you cannot see, is changed. The cycle then repeats itself when you queue up for your next match.
There isn't any more information that that, which was released by Bornakk late last night.
Bornakk warns that you might notice some odd behavior in arena matches.
And there are a lot of reports of oddities, but they're mainly QQ from people that are not giving any real specific feedback. We're on the lookout for some of that though so we can report on it.
One thing that does not sit well with many, and rightly so in my opinion, is that there are hidden statistics which affect our gameplay that we cannot see and manipulate. And by manipulate I mean manipulate in the good way, not the bad / illegitimate way. Blizzard likely wants to hide this rating and its internal mechanics so that people don't complain too much about it. But if history teaches us anything, obfuscation of important things / statistics is never a good idea.
We'll have to wait and see if this is a good idea or not.